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94th Congress | COMMITTEE PRINT 

2a Session J 



MARKETING ALTERNATIVES FOR 
AGRICULTURE 

Is There A Better Way? 



PREPARED FOR THE 

SUBCOxMMITTEE ON AGRICULTURAL PRODUCTION, 
MARKETING, AND STABILIZATION OF PRICES 

OF THE 

COMMITTEE ON AGRICULTURE AND FORESTRY 
UNITED STATES SENATE 




67-134 



U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1976 



COMMITTEE ON AGRICULTURE AND FORESTRY 



HERMAN E. TALMADGE, Georgia, Chairman 



JAMES O. EASTLAND, Mississippi 
GEORGE McGOVERN, South Dakota 
JAMES B. ALLEN, Alabama 
HUBERT H. HUMPHREY, Minnesota 
WALTER D. HUDDLESTON, Kentucljy 
DICK CLARK, Iowa 
RICHARD B. STONE, Florida 
PATRICK J. LEAHY, Vermont 



ROBERT DOLE, Kansas 
MILTON R. YOUNG, North Dakota 
CARL T. CURTIS, Nebraska 
HENRY BELLMON, Oklahoma 
JESSE HELMS, North Carolina 



Michael R. McLeod, General Council and Staft Director 
Henry J. Casso, Chief Economist 
Carl P. Rose, Counsel 

James W. Giltmier, Professional Staft Member 

William A. Taggart, Professional Staif Member 

Dale L. Stansbury, Economist 

Thomas Reese Saylor, Economist 

James C. Webster, Chief Clerk and Press Secretary 

Phillip L. Fraas, Assistant Counsel 

Stephen E. Storch, Assistant Counsel 

Roy Frederick, Economist 

Stuart B. Hardy, Professional Staff Member 

Reider J. White, Research Assistant 

Dixie Lee Talley, Finance Secretary 

Betty M. Mason, Clerical Assistant 

Helen A. Miller, Clerical Assistant 

Laura D. Rice, Clerical Assistant 

Margaret Kelley, Clerical Assistant 

Denise a. Love, Assistant Clerk 

Maureen T. Burke, Clerical Assistant 

Nancy W. Whitehead, Clerical Assistant 

Ann C. Bond, Clerical Assistant 

Diane G. Covington, Clerical Assistant 

Jo R. Patton, Clerical Assistant 



Subcommittee cn Agricultural Production, Marketing, and 
Stabilization of Prices 

WALTER D. HUDDLESTON, Kentucky, Chairman 

GEORGE McGOVERN, South Dakota MILTON R. YOUNG, North Dakota 

JAMES O. EASTLAND, Mississippi HENRY BELLMON, Oklahoma 

HUBERT H. HUMPHREY, Minnesota ROBERT DOLE, Kansas 

DICK CLARK, Iowa JESSE HELMS, North Carolina 

RICHARD B. STONE, Florida 

Ex OflEico Member 



HERMAN E. TALMADGE, Georgia 

(II) 



LETTER OF TRANSMITTAL 



New York State College of Agriculture and 

Lefe Sciences, 
Cornell University, 
Ithaca, N.Y., February 11, 1976. 

Senator Walter D. Huddleston, 

Chairman, Subcommittee on Agricultural Production, Marketing, and 
Stabilization of Prices, Committee on Agriculture and Forestry, 
U.S. Senate, Washington, D.C. 
Dear Senator Hlt)dleston: Agricultural markets and the basic 
agricultural marketing system have suffered numerous jolts during the 
past 3 or 4 years. I know you are acquainted with the situation as your 
Subcommittee on Agricultural Production, Marketing, and Stabiliza- 
tion of Prices has been actively investigating many of the specific 
aspects of the problem such as the boxcar shortages, and retail food 
prices. 

The National AgTicultural Public Policy Committee, chaired by 
Wally Barr of the Ohio State University, also recognized that our 
agricultural marketing system was under pressure and this commit- 
tee recommended that an analysis of the situation and possible 
opinions be undertaken. Subsequently, an ad hoc committee of 26 
agricultural economists from land grant universities and the U.S. De- 
partment of Agriculture was formed to assess the question, "Is there a 
better way for farmers to market their products ?" 

I am pleased to transmit the resulting papers to you for use by your 
subcommittee. They are written to be controversial and to provoke 
thought and discussion. They should not be considered as definitive 
nor final. The authors hope for feedback. Not only Avould this be bene- 
ficial to the committee in its deliberation, but would be beneficial to 
the authors as they continue to develop their statements. The ad hoc 
committee of authors will incorporate feedback to the extent it con- 
tributes to the issue at hand into the next writing. The intended final 
product is a set of educational leaflets which will be available for 
distribution and use by the extension services of the various states bv 
fall 1976. 

There are 12 individual papers. The first paper, "The Situation 
Now" attempts to identify the concerns that farmers, agribusiness and 
the public have about the marketing system, real or imagined. Each 
of the next 10 papers discusses one or more specific policy issues which 
could affect substantiall}^ the market options open to farmers. There 
are many contrasts among them. Some involve rather narrow and 
specific proposals of interest to a few commodities. Other proposals, 
such as the industrial restructuring paper, are bold, sweeping, even 
controversial and have implications for everyone in the economy. 
Some of the proposals suggest making the competitive open market 

(HI) 



IV 



system work better. Others, in effect, suggest abaiuloiiiiig the competi- 
tive open market through the development of farmer group action 
and market ]X)wer. ]\Iost of the proposals focus maiidy on the domestic 
market, although one considers the possilnlities of a'more centralized 
<'onti-ol of export trade. 

Each of the options discussed is believed to be an alternative consis- 
tent enough Avith the stated objectives of farmers to be worth consid- 
eration in some part and occasionally in all of agriculture. Second, 
none is presented as the solution for any part, and certainty not all, of 
agriculture. Third, this set of proposals is not designed to be the com- 
plete set wliich ought to be considered. Eather it is a sampling of 
marketing alternatives. 

Three papers suggest institutional arrangements designed to im- 
prove market access, increase and improve the amount of information 
available concerning markets to farmers, and improve the process of 
A'alue or price determination. They are titled. "Central izecl Reniote- 
Access ]\Iarkets,'' "Forward Delivei-able Contract ^larkets,-' and 
''^laudatory Public Reporting of ^Market Transactions." 

The market institutions discussed in five of the papers would in- 
volve group action and, in some cases, substantial change in legisla- 
tion to make more group action possible. The five papers are "Exclu- 
sive Agenc}' Bargaining,*' "Vertical Integration Through Ownership." 
"Joint Ventures Among Cooperatives and Xon-Cooperative ]Market- 
ing Firms." "Marketing Orders." and "Marketing Boards." These 
institutioiial arrangements would be designed to obtain market access 
•and to influence price stability through cooperative effort. The use of 
marketing boards and the expansion of marketing orders to coordinate 
the quantity and quality of production with market opportunities is 
■examined. ^larketing boards are discussed as a possible means of 
influencing international trade in agricultural commodities. 

Two of the pa])ers concern themselves with very broad regulatory 
issues affecting the Avorking of much of the economy. The paper on 
"Industrial Restructuring: A Policy foi- Industrial Competition" is a 
sweeping proposal to change by legislation the nature of the competi- 
tive game by reducing the size of some of the large plavere. The paper 
on "Fine Tuning the Present System" includes a set of suo£rested 
administrative actions to improve the way the present agricultural 
ma rketino- system works. 

Implicit in each of the papers is the assum]:»tion that the establish- 
ment or the extension of tlie institutional arrangement will have direct 
and indirect impacts on the performance of 'the marketing system 
which would in turn have an impact on farmers' and consumers' wel- 
fare. Since the arrangements have not been actuallv tried, conse- 
quences presented are the authors' best educated estimates and thus 
must be considered as tentative. 

On behalf of the ad hoc committee and authors I thank you, your 
committee and vour staff for publishing these papers as a Committee 
Pi'int.^ Hopefully they will provide the basis for a useful and con- 
structive forum. 

Sincerely yours, 

Olax D. Forker, 

Professor of Marketing and Chairniaii. Ad Hoc Committee, 



FOREWORD 



The American aoTiciiltiual producer and the marketing system 
that delivers his products to consimiers across the Xation and aroiuid 
the workl are testimonials to modern technology and organization. 
The 215 niillion American consumers enjoy the widest variety of 
wholesome foods and at the most reasonable cost that any group of 
consumers has ever enjoyed in the history of mankind. At the same 
time, this American food and fiber machine has been al^le to supply 
a good share of its production to a hungry world. 

On the whole, these achievements have gone imnoticed. We all have 
come to expect quality fruits and vegetables on our grocery shelves 
year around. We want choice beef, pork, and poultr}^ every day just 
as we expect our milk, eggs and other products to always be fresh. 

While the achievements are accepted as commonplace, the recent 
disrtiptions in this marketing system have not gone imnoticed. Since 
the first large Eussian grain deal — the signpost of the chariging sit- 
uation — agricultural prices have become unstable and generally in- 
creased. In the nearly 4 years since the Russians came, we have also 
experienced a succession of unexpected and complicated marketing 
]:)roblems. The worst weatlier conditions in history played havoc 
with supplies in 1974, and the energy-crisis has totally distorted the 
cost relationships for production and marketing, to cite just two. 

The persistent tight supply position and higher production costs 
have impacted on retail prices of food. The long-term downward 
trend of consumer expenditures on food as a share of disposable 
income basis has been reversed. This reversal has focused the attention 
of everyone on our food marketing system. 

The Subcommittee on Agricultural Production. Marketing, and 
Stabilization of Prices of the Committee on Agriculture and Forestry 
has, for nearly 2 years, been working on this complex question. We 
recruited the Department of Agriculture and numerous scientists 
from across the country to pre])are a descriptive analysis of our mar- 
keting system and established the fimctional costs of each of the 
marketing steps. In addition, we have compiled a large number of 
emi^irical analyses of the impacts of market changes upon consumers, 
processors, and producers. The subcommittee held field hearings 
on this question in Colorado. Texas and Kentucky in February and 
March of 1975. There we saw. first hand, the production, processing, 
and distribution of food products and also heard about the problems 
from dozens of representatives of every sector of the food marketing 
system includino- producers and consumers. 

Because of the complexity of the issues, we are the first to admit 
that our findings are not conclusive. Xo single villain stands out. Xor 
can we suggest that increased costs are a short-term phenomenon. It 

(V) 



VI 



is evident, however, that the "system" is interdependent. It is also 
clear that without the system, the welfare of all Americans would be 
•endangered. 

Although no quick panacea is at hand, there are problems and a 
tuneup is in order. In fact, major modifications might be demanded 
clue to the changing economic and technological circumstances. 

However, any such modification must be done with care and with 
awareness of the impacts. As a result, as chairman of the subcom- 
mittee, I requested that the Department of Agriculture begin an assess- 
ment of current marketing practices and to focus on alternative mar- 
keting systems that might more efficiently deliver agricultural products 
to consumers. This effort is now underway and Avill provide needed 
information over the next 2 years. 

This effort seems especially important because a large share of the 
increased costs of food and fiber is due to cost factors between the 
farmer's gate and the consumer's kitchen. In fact, about 60 cents out 
of every dollar consumers spend on food goes to market functions — 
for transportation, packaging, processing, energy, labor, and profits. 

It also seems appropriate because of the distressing fact that wJiile 
farm prices go down as well as up, the cost of the marketing functions 
only go up. A fairly typical example of this fact is seen in the last 
quarter of 1975. During that 3-month period, the farm cost of a typical 
market basket of food declined about 7 percent. However, the total 
retail price of that market basket of food increased by II/2 percent. 

Clearly improved efficiency in the marketing system would be of 
benefit to the consumer and also the producer. The consumer would 
realize lower costs or better quality products and producers could ex- 
pect more equitable returns. Equally important, this could be achieved 
without de]3riving the marketing system of its needed financial returns. 

The question of marketing alternatives and the potential benefits 
of change in the current marketing system has also been recognized 
by scientists in our universities and at the Department of Agriculture. 
The Xational Agricultural Public Policy Committee that is chaired 
by Wally Barr of the Ohio State University recommended the forma- 
tion of a committee to assess the question of marketing alternatives. 
About a year ago, an executive committee was formed for the purpose 
of finding a way to carry out the charge. Subsequently, an ad hoc 
committee, made up of 26 agricultural economists, under the leader- 
ship of Dr. Olan D. Forker, Professor of Agricultural Economics 
at Cornell University, has proceeded to do an analysis of marketing 
alternatives. 

Tlieir operating premise was a simple question, "Is there a better 
way?". The ad hoc committee looked at the current situation as re- 
viewed in the first paper in the print and from this point, these agri- 
cultural marketing experts looked for and at the options. 

I believe they followed a legitimate and laudable approach. The 
12 papers they have produced provide insight into many current prob- 
lems and a virtual feast of food for thought. It should also be noted 
that their efforts to assess the possible options are balanced with state- 
ments of potential costs as well as gains. 

In true academic ti-adition, the authors disclaim any final conclu- 
sions and suggest their papers are working papers. However, I think 



VII 



they are well-thought-out products that can be of value to anyone 
who is interested in our marketing system and they are imperatives 
for anyone who wants to assess the possible alternatives that might 
improve the system. For these reasons, I am happy to have this oppor- 
tunity to publish the 12 papers as a committee print. As chairman of 
the Subcommittee on Agricultural Production, ^larketing, and Sta- 
bilization of Prices, I wish to extend my appreciation to each of the 
individuals and their supporting institutions or agencies for their 
contribution in this effort. 

Further, I believe that all the materials contained herein are 
soundly based on theory and empirical evidence. However, the Mem- 
bers of the subcommittee do not necessarily agree with all of the asser- 
tions made in this publication, nor do these views necessarily reflect the 
official position of any of the associated institutions or agencies. 

Walter D. Huddleston, 
Chahmian^ Suhcommittee on Agricultural Production^ 

M arJceting, and Stabilization of Prices. 



Digitized by the Internet Archive 




in 2013 





http://archive.org/details/marernaOOunit 



CONTENTS 



Page 

Letter of transmittal in 

Foreword v 

The situation now 1 

Is there a better way 1 

The winds of change 2 

A want list 4 

Ten marketing alternatives 7 

Centralized remote-access markets 9 

Introduction 9 

Electronic trading 10 

How and where electronic trading is used 11 

The necessary elements for success 13 

Anticipated results of electronic marketing : Gains and losses 14 

Implementation of electronic marketing systems 15 

Forward deliverable contract markets 17 

Introduction 17 

A definition of FDCM 17 

The applicability of FDCM 19 

Some examples 20 

Expected economic consequences of FDCM 22 

Implementation 20 

Conclusions 27 

Mandatory public reporting of market transactions 28 

Introduction 2<S 

A mandatory market reporting system 29 

How and where mandatory reporting is applied 33 

Conditions for implementation 34 

Results expected 35 

Consequences 35 

What w^ould be necessary to get mandatory reporting . 36 

Conclusions 37 

Exclusive agency bargaining 38 

Introduction 38 

A definition of exclusive agency bargaining . 38 

Why exclusive agency bargaining is a useful tool 39 

Examples of exclusive agency bargaining . 39 

Areas of potential use and alternative institutional arrangements- 40 

Advantages and disadvantages of exclusive agency bargaining . 41 

The design of enabling legislation 44 

Operations of associations . 46 

Methods of achieving exclusive agency bargaining . 47 

Vertical integration through ownership . 49 

Introduction . 49 

Individual and group integration 50 

Requirements for success . 52 

The consequences of vertical integration 52 

Methods of achieving vertical integration 55 

Joint ventures among cooperative and noncooperative marketing firms_. 57 

Introduction . 57 

Examples of existing joint ventures 58 

Conditions necessary for .ioint-venture success 60 

Potential impact on joint-venture participants 61 

Potential impact on nonparticipants 63 

Implementation 64 

(IX) 



X 



Page 



Marketing orders C6 

Introduction <j6 

Possible future uses of market orders 68 

Conditions for implementation 70 

Potential impacts 71 

How to achieve expanded marketing-order programs 71 

Marketing boards 73 

Introduction 73 

Establishment and use of marketing boards 74 

Implications of marketing boards for the United States 78 

Establishment and successful operation 80 

Fine tuning the present system 82 

What is a fine-tuning strategy? 82 

Fine tuning to reduce effects of monopoly in agriculture 83 

Fine tuning to improve the producers' market position 86 

Fine tuning to improve market information and pricing 87 

How to achieve fine tuning 88 

Effects of fine tuning 89 

Limits of fine tuning 90 

Industrial restructuring : A policy for industrial competition 91 

Introduction 91 

The current status of antitrust legislation, enforcement, and concen- 
tration 91 

Alternatives for dealing with market power 93 

Basis for diffusing concentrated industries 94 

Implementing restructuring 95 

Consequences of reducing market power 96 

Concluding thoughts 99 

The options in perspective 104 

The marketing problems addressed 104 

Producer initiatives versus government involvement 105 

Commodity applications 105 

Can combinations be used 107 

How will benefits be distributed? 107 

Implication of benefits for policy 109 



THE SITUATION NOW 

(By Y. James Rhodes^ and Olan D. Forker^) 



Is There A Better Way 

''There must be ca better way to market my products!" Sucli is the 
bitter cry of an isolated producer unable to obtain more than a single 
bid for his crop. It is also the optimistic assertion of a young, com- 
petent farm manager who believes his many achievements in improA'ing 
his productive efficiency can surely be cluplicated in his marketing 
program. Whether the search for better marketing alternatives reflects 
a do-or-die crisis or rather a simple seeking of improvements, it is 
common to many producers and others in the marketing sj'stem. 

The search goes down many avenues. Important — and sometimes 
impossible — demands are m.acle on the performance of the marketing 
SA'stem. Prices and pricing are frequenth^ at the head of the list. How 
do 1. as a farmer, ensure that I obtain a truly com^petitive price for my 
products ? AVhen there are onh^ two or three readily accessible handler 
markets and their offer prices are usually the same, is that a com- 
petitive price ? Or even if there are many handlers, but thej sell to only 
two or three processors, am I getting a competitive price reflected back 
to me ? 

Price fluctuations, always important, Imve increased in magnitude 
the past few years. Once there was only a little embarrassment when 
a neighbor's cattle brought 50 cents more on Yrednesday than mine 
brought the following Monday. Xow, when the possible price difference 
is $2 to $4, one asks is there any equity in such a marketing system? 
Why do we farmers always have to be price-takers ? How can we gain 
some influence over pricing — as the dairymen have done — and level out 
these wild price fluctuations ? Why should I have to take $4 a bushel 
less for mv sovbeans in June than I could have received at the combine 
last fall 

Are there opportunities for bettering the price-quality relationships 
in the market place ? Kesearchers say a high-cutability steer is worth 
50 percent more than a low-cutability steer. I have the know-how and 
the production system to produce those more valuable cattle. How can 
I develop a marketing plan that will pay me more accurately for the 
quality delivered, whether it is cattle or wheat or fresh vegetables? 

I'm basically a corn-soybeans producer on this 600 acre Iowa farm, 
but I farrow and feed out 100 litters of pigs a 3'ear. A few of my 
neighbors ship their hogs to the teiTninal market, but that's too costly 
and inefficient a marketing method to suit me. There are five buying 
points within a ten mile radius, so I get on the telephone to them 
when I'm ready to sell hog-s. I'm fairly satisfied with the competitive- 

1 Professor, Department of Agricultural Economics, University of Missouri, 

2 Professor, Department of Agricultural Economics, Cornell Eniversity. 

(1) 



2 



"ness of their })i(ldiii<>-. I do ^et downri^rlit disgusted when I sell at 
$2 or $3 less tlian if I had sold a week later. Those price fluctuations 
are too big and unpredictable. I don't think the quality premiums are 
half what they ought to be ; grade and yield selling in the meat makes 
the most sense to me. If we farmers had some kind of an organization 
to police grade and yield selling I might give it a try. 

I'm a Kansas wheat producer. The farm is paid for, and I figure 
I can stand the ups and downs of wheat prices and tlie yearly fluctua- 
tions in yields. It does bother me when I see how little of the price of 
a loaf of bread or a box of breakfast cereal ever gets back to me. More- 
over. I'm still a little mad about the Eussian Wheat Deal. The hard 
work is in the production and the money is in the marketing. And 
then, w4ien the export market makes ])roduction attractive consumers 
complain about high prices, so the President arbitrarily closes the door 
to exports and prices fall. If farmers would unite together, we ought 
to be able to change that. 

I grow green peas under contract to a local proprietary food proces- 
sor. The price is set prior to harvest. IMy only choice is to grow or not 
to grow. The processor, of course, does take all the market risk of a 
price change between planting and harvest time. The contract price 
is not competitively determined because I have no choice and little 
basis for comparison. There must be a way to bring competitive forces 
to bear on the contract price determination taking place before 
planting. 

I am an egg producer. My price is determined b}^ a private news 
reporter who indicates through a price quotation his view of the cor- 
rect market value on any day. Only one, small- volume, organized 
exchange functions for the industry. Volume is too low for me to have 
much confidence in the price information it generates, and I don't feel 
very comfortable with the omnipotence of the private news reporter. 
How can we develop more trading volume on the organized exchange 
so I can feel comfortable about the values determined there? 

Milk marketing has come a long Avay since the chaotic days of the 
Depression. Milk marketing orders have stabilized prices and helped 
ensure an adequate supply of milk for fluid uses. But milk selling- 
prices appear to change slowly and not always in relation to changes 
in supply or market conditions. Vertical and horizontal integration 
through organized cooperatives has progressed farther in milk than 
for any other commodity group. Yet some cooperatives continue to 
have financial problems, and there are continual problems in the bal- 
ance of power and control over their operation and the manner in 
which the costs/benefits of cooperatives are shared among producer- 
members. Although many point with pride or envv to what has hap- 
pened m marketing policy tow^ard milk, there must be a better way 
even here. Other commodity groups have their OAvn unique set of prob- 
lems and opportunities. Often it is not clear if a change in institutions 
or institutional arrangements will provide a better wav for farmers 
to market their products. 

The Wixds or Ciiaxge 

^ It would be easy to overstate the extent of new agricultural market- 
ing problems. Some are as old as the country itself. Problems of market 



3 



access lack of hujer competition, inadequate market inform.ation, and 
extreme price fluctuation have never been totally absent. Likewise, new 
marketing institutions have developed from time to time to meet per- 
ceived problems. Even as the terminal livestock market, one of our 
most venerable institutions, fades away it is well to remind ourselves 
that less than a century ago it was a flourishing new answer to utiliz- 
ing the new railroad system as a route to Eastern markets. Thus, it is 
useful to re-examine periodically the particular changing environment 
of our day which shapes the opportunities for new answers to old 
problems. 

The changing size and specialization of farm units is a most im- 
portant factor. Larger size eliminates much of the need for the assem- 
bling and consolidating of shipments, functions once provided by 
many small handlers. Larger size ancl specialization permits more 
interest and expertise of the producer in marketing. But these factors 
also increase market risk and sensitivity to large swings in price. 

Of likely greater importance is the continued growth of the sophisti- 
cated systems agribusinesses use to organize the procurement of farm 
products. While these systems are at varying stages of development, 
there is a growing degree of vertical coordination of many products. 
Many agribusiness firms have the depth of finance and management to 
coordinate, and sometimes integrate, the flow of products from farm 
to retail. For some products, such as canning-vegetables, agribusiness 
handlers and processors have set up such extensive acquisition systems 
the managerial role of the farmer is sharply curtailed. In the extreme, 
as in broilers, the independent farmer has access only to a market for 
his labor, not to a market for broilers. 

Larger, more sophisticated and centralized cooperatives are part of 
today's marketing environment. Cooperatives are central to marketing 
products such as milk. A few cooperative brand names are now well 
enough accepted to give them merchandising leverage at retail. On the 
other hand, some bargaining cooperatives, handle a sufficiently large 
fraction of a product to negotiate effectively with handlers. There is 
renewed interest among farmers in cooperatives to use the system as a 
way to gain market influence and forward integration. Yet many 
farmers still tend to believe such group action is a fine thing — for other 
farmers— but maybe not for themselves. Even as cooperatives are ac- 
complishing more, there are renewed questions in government about 
the role and power of cooperatives. Group efforts bv farmers run the 
risk of encountering very limiting regulations. 

There is a new awareness among farmers of a problem that might be 
called market security. There was a time when one need not ask if there 
would be a demand tomorrow for a farm product. After all, people 
have to eat, and there will always be a demand for pork, beef, bread, 
cream, and butter. But the recent and dramatic decline in per capita 
consumption of the last two items has shaken that confidence. We live 
m a merchandising world where items sell because they are sold as 
much as they are demanded. Accordingly, there is more and more in- 
terest in both agribusiness and independent farmers in having control 
of those merchandising activities which do today's selling and there- 
by influence tomorrow's demands. Thus there is more farmer interest 
in forward integration, and "marketing" is concerned with the whole 



4 



system — all the way to the consumer — rather than stopping with a 
satisfactory sale to the first handlers. 

Finally, the recent withdrawal of the Federal Government's heavy 
influence on market prices and sui^plies of basic commodities has stimu- 
lated new interest in industry do-it-yourself programs. Those govern- 
ment programs affected the prices and supplies of livestock and poultry 
and even of many competing specialty crops, so that their impact was 
quite widespread. Much of the recent wild price fluctuations, not only 
in corn and wheat, but also in livestock, poultry, and even in annual 
fruits and vegetables, can be attributed to the jump in our exports and 
the elimination of Commodity Credit Corporation grain stockpiles. 

A Want List 

A complete list of the objectives of farmers, agribusiness firms, and 
of the general public for agricultural marketing policy alternatives is 
not possible. Fortunately, neither is it necessary for the task at hand. 
[Rather, a statement of some basic objectives or expectations gives a 
^useful check list as various marketing options are discussed later. 

Expectations of farmers. — Numerous values of farmers are reflected 
in their expectations of a marketing system. A farmer tends to be a 
maximizer. He wants the best possible i)rice. A farmer — like almost 
everyone — has strong feelings about equit}^ These concerns may in- 
clude objections to certain practices as "unfair"; demands that all 
sellers in comparable situations be treated equally; resentment that 
agribusiness gets more than its share of the market decision-making 
and monetary rewards. 

INIany farmers emphasize their personal freedom as entrepreneurs. 
Such farmers may prefer maintenance of many options and a system in 
which they make all the decisions up to the point of sale. Other farm- 
ers are reconciled to making trade-offs which lessen risks or to achiev- 
ing more personal security by accepting the discipline of an agri- 
business contract or the discipline of group effort. The variation among 
farmers' expectations is affected by their accustomed marketing en- 
vironment. Farmers who have always sold in open markets are more 
likely to have expectations geared toward such markets than are farm- 
ers who operate in bargaining or vertically integrated environments. 
Hegardless of the type of market system, a farmer generally desires 
^ system that — 

1. ((2) treats him and his fellow-producers equitably, that is, a 
system of pricing and market access based upon his products' 
market performance rather than the personal attitudes of the 
buyer or contractor toward him as an individual ; 

(&) provides adequate prices in vicAV of production costs. While 
endless controversy can be generated by the conflicting views of 
what constitutes adequacy, this objective is frequently voiced. 
Perhaps there would be most agreement on the importance of 
realizing reasonably predictable prices at the time production 
decisions are made ; 

(t?) reflects to him the quality-price differentials paid by con- 
sumers ; and 

{d) rewards his contribution as adequately as it rewards mar- 
keting firms for their contributions. 



In addition, a farmer selling- in what purports to be a competitive, 
open market generalh^ desires— 

2. (a) access to conveniently located market outlets; 
( & ) a viable choice among A'alid competing buyers ; 

(c) the ability to move to market and/or sell any amount that 
he may clioose at any time ; 

(rZ) sufficient timely ancl adequate market information so that 
he may obtain the best available offer at any given time and so 
rationally time his sales : and 

(e) sufficient confidence in marketing processes and institutions 
so that he feels the system is not vx orking against him nor against 
fellow-producers. 
A farmer operating outside the open market (producing for a 
contractor or selling through a bargaining association) places his reli- 
ance upon a set of forces different from those of competing buyers 
and has a different set of objectives to add to those listed in 1. He 
generally desires — 

3. (a) bargaining power equal to or. preferabl3% exceeding that 
of the procurement agency with which he. his marketing coopera- 
tive or his bargaining associations, deals ; and 

(b) the abilit}^ as an individual to obtain equitable treatment 
vis-a-vis other producers within the contracting or marketing or 
bargaining process. AVhere there is group marketing or bargain- 
ing, such individual equity may depend much upon the rules of 
the game enforced within the group. 
Various other objectives are entertained of course. Many a farmer 
in group situations would like to be a free rider who reaps the benefits 
of grotip action without any of the disciplines. It may be true that 
a farmer desires accurate cpality-price differentials only when he 
has a premium product, and that when Jie pleads for ''equity," he 
reallv wants better treatment than his neighbors. 

Such obviously unrealistic expectations can be readily dismissed. 
However, less obviously unrealistic expectations may present difficul- 
ties. On occasion farmers may have as good a marketing s^'stem as is 
within their political and economic power to achieve, but they may 
continue to be involved in various abortive attempts to change it be- 
cause of "too high"' expectations. 

ExpectatiGns of Agrihusincss -firms. — These expectations vary ac- 
cording to a company's size and complexity. Some firms, such as small 
family-run elevators, may be operated by individuals who share with 
many farmers basic concerns about intrepreneurial freedom and 
equity of treatment. However, mtich of agribtisiness is larger corpora- 
tions operated by professional management. Their expectations and 
their efforts exert strong forces tipon the types of marketing options 
open to farmers in various market situations. 

While an agribusiness firm is also a maximizer. it may be equally 
concerned with growth. It aims for an adequate and, frequently, a 
growing stream of profits and sales. A growing firm will attract better 
caliber management and Avill motivate and reward managers more 
highly. 

Security of the firm is given a large premitim. Managers do not like 
large risks. They generally resist large fluctuations in sales and profits, 
preferring smaller, more stable sales and income streams to larger. 



6 



more viablo ones. Likewise, a vertically controlled system is frequently 
more appealin<r than dependence on the uncontrolled open market. 
]\Iana<i^ers are expected to manage, and they like to minimize environ- 
mental factors which are outside their managerial control. 

Managers perceive the market channel as a power system. They gen- 
erally believe they can maximize the security of the firm and increase 
their- market o]:>tions by actions and arrangements which increase their 
control through the market channel. Examples are many. Develop- 
ment of strong brands with good consumer acceptance is a prime way 
for processors to increase their power and security in a market chan- 
nel. Vertical integration, forward and backward, generally increases a 
firm's power within a channel. Various contractual measures to insure 
the continuity and stability of farm products procured may increase a 
processor's power within the marketing system. 

The amount of agricultural products supplied constitutes the size 
of the current demand for the handling, processing, storage, and trans- 
portation services provided by most agribusiness. Fixed facilities and 
costs are ordinarly quite important, so a big crop is almost always more 
profitable than a small one. Hence the shoit-term interests of farmers 
and agribusiness conflict. 

Timely and accurate information about all relevant supply and de- 
mand conditions are regarded very highly by agribusiness firms. Their 
attitudes toward the public versus private provision of that informa- 
tion vary. In many situations large firms could probably increase their 
own profits and market power by development of a proprietory system 
available only to themselves. Where a public information system is 
available, agribusiness firms expect to use it, of course. But agribusi- 
ness firms generally have more and better information about demand 
conditions than is presently available to producers, and they tend to 
guard such information as a private asset. 

While several objectives of agribusiness motivate some form of ver- 
tical integration into agricultural production, there are frequently 
some important deterrents. The amount of risk in agricultural produc- 
tion is one of the most important. While agribusiness involves many 
firms with very large assets, their capital is still small compared to the 
possible annual production losses in major products such as grains and 
livestock. Consequently, firms may be interested in marginal efforts to 
control supplies, but may be very reluctant to enter into large-scale 
commitments involving significant increases in risks. 

Expectations of the general public. — Consumers expect adequate 
supplies of food at reasonable prices. While an adequate supply of food 
in the aggregate at an overall reasonable price level is sufficient for the 
prevention of hunger for most of the population, what about fluctua- 
tions in the supplies and prices of individual foods? Sharply higher 
prices of major expenditure items such as beef or milk or baked goods 
is likely to cause considerable dissatisfaction. Presumably similar 
"shortages" of cranberries or carrots is of relatively less concern. 

How to define "reasonable price" is a moot question. One consumer 
standard for a reasonable price is what it was last year, so sudden and 
large price increases are very likely to be regarded as unreasonable. 
Another standard of reasonableness is price in relation to consumer in- 
come. A nation accustomed to spending a smaller proportion of its dis- 
posable personal income each successive year on food is likely to resist 



7 



a reversal of that trend. Yet another standard of reasonableness is re- 
lated to farm and agribusiness income. Non-agrarians have a consider- 
able reservoir of good will toward farmers — they do not expect to eat 
cheaply at the expense of reasonable incomes to farmers and farm labor. 
That expectation is two-edged, of course. Consumers can easily be 
irritated by evidence that monopoly returns are being earned by those 
producing and/or marketing their food supply. 

Consumers have long shown a taste for variety, for new products, 
and for convenient labor-saving items; however during the 1974^75 
recession, there were drops in sales of numerous specialty and con- 
venience items. Perhaps the message is that consumers want variety 
and welcome the opportunity to try new items, but they expect value 
commensurate with cost. 

Consumer activists voice numerous specific expectations about in- 
dividual products and about the general working of the food produc- 
tion-marketing system. On the other hand, the mass of consumers seem 
little interested in many of these detailed aspects. Perhaps many 
would agree that the public expects accountability : they want evidence 
that the food system is providing safe, palatable food in a rational, 
economical manner. 

Implications of these expectations. — A marketing process or institu- 
tion cannot be all things to all people. Conflicts among the expectations 
of farmers, agribusiness, and consumers are inevitable. Yet it is diffi- 
cult to imagine the existence of a food marketing system which does 
not meet some of the basic aspirations of each group. These propor- 
tions need not be equal. Some marketing systems exist that are biased 
toward the aspirations of farmers and others toward those of agri- 
business, depending upon which group has the greater muscle to 
achieve its ends. 

The rnessage to farmers considering new marketing alternatives is 
clear: First, the proposed alternative must sufficiently meet farmers' 
aspirations to receive their support. Second, it must meet the aspira- 
tions of agribusiness or farmers must have the muscle to withstand the 
economic and political power of agribusiness to put it over on their 
own. Third, failure to meet the basic aspirations of the general public 
may lead to political defeat. That these three conditions are formida- 
ble cannot be denied. In fact, in numerous situations around the coun- 
try, they eliminate serious consideration of the alternatives described 
in the papers which follow. The task is to find those situations where 
a new marketing alternative presents real opportunities to farmers. 

Ten Marketing Alternati\tes 

Each of the ensuing ten papers discusses one or more specific policy 
issues that do or could effect substantially the market options open to 
farmers. There are many contrasts among them. Some involve rather 
narrow and specific proposals of interest in a few commodities. Other 
proposals, such as industrial restructuring, are bold, sweeping, even 
controversial, and have implications for everyone in the economy. 
Some proposals involve making a competitive, open-market system 
work better. Others, in effect, abandon the competitive open market, 
and develop a basis for farmer group action and market power. Most 



67 131— 76 2 



8 



of the proposals focus mainly on the domestic market, although one 
considers the possibilities of more centralized control of foreign trade. 

Contrasts aside, the selection criteria give some commonality to the 
proposals. First, each is believed to be an alternative consistent enough 
Avith the stated objectives of farmers to be worth consideration in some 
part, and occasionally in all, of agriculture. Second, none is presented 
as the solution for any part and certainly not for all of agriculture. 
Third, this set of proposals is not designed to be the complete set which 
ought to be considered. Rather, it is a sampling of marketing alter- 
natives. Time limitations of the authors, cost limitations of the spon- 
sors, and patience limitation of the readers dictate a selection rather 
than a census. Not all readers, nor even all of the authors, will agree 
that this selection is necessarily the best one. We hope that after read- 
ing the papers you wdll agree they are a useful, thought-provoking 
discussion of a set of marketing alternatives relevant to much of 
present-day agriculture. 

Market mechanisms concerned with determining price and main- 
taining market access for individual farmers are discussed in : 
Centralized Remote-Access Markets ; 
Forward Deliverable Contract Markets ; and 
Mandatory Public Reporting of Market Transactions. 
The next set of market institutions evaluated generally involve 
group action. Some involve attempts to obtain market access and to 
influence pricing stability through cooperative marketing or bargain- 
ing. The possible uses of marketing orders and boards to coordinate 
the quantity and quality of production with market opportunities are 
also examined. The papers are : 

Exclusive Agency Bargaining; 

Vertical Integration Through Ownership ; 

Joint Ventures Among Cooperative and Non- Cooperative Mar- 
keting Firms ; 

Marketing Orders ; and 
Marketing Boards. 
The last two papers concern very broad regulatory proposals affect- 
ing the working of much of the economy. Industrial restructuring is a 
sweeping proposal to change by legislation the nature of the competi- 
tive game by reducing the size of some of the largest players. Fine 
tuning includes a set of suggested administrative actions to improve 
the way the present agricultural marketing system works. The pro- 
posals are covered in : 

Industrial Restructuring: A Policy for Industrial Competi- 
tion ; and 

Fine Tuning the Present System. 



CENTRALIZED REMOTE-ACCESS MARKETS 

(By Dennis R. Henderson/ Lee F. Schrader,^ and Michael S. Turner^) 



Introduction 

Thin markets are characterized by low volume, lack of competition 
among bidders, inadequate information, unaccessibility to traders, and 
a high potential for price manipulation. In such markets the validity 
of prices erodes to the point where they often do not closely reflect true 
market conditions, that is, prices generated in thin markets frequently 
are not representative of actual supply/demand pressures, are not 
accurate measures of product value. 

Thin markets result from a movement away from centralized mar- 
kets to country markets, local auctions, direct buying, and contract 
production. A major problem occurs when many want to use market 
prices as the basis for establishing product values but few are using 
an open market for buying and selling. Centralized, remotely-acces- 
sible markets offer an alternative which combines many of the ad- 
vantages of direct buying and decentralized markets wath the pricing 
accuracy normally associated with large, open inarkets. 

Imagine, if you will, a marketing system with the potential to ex- 
pose the offering and bid of each seller and each buyer ; a market that 
moves products directly, or nearly so, from seller to buyer ; a market 
that can be entered by both buyers and sellers wherever they are ; and 
one that provides a ready source of instant market news. A tall order? 
Yes, but clearly within the realm of possibility. These are electronic 
markets and some, as will be noted, are already in use. 

Essential to these markets is the separation of two distinct but 
often combined marketing functions : negotiating the trade, and physi- 
cal transfer of the product from seller to buyer. In most markets — 
grain elevators, livestock auctions, terminal markets — ^these functions 
are often performed simultaneously out of tradition, but not necessity. 

In order to achieve a high degree of pricing accuracy it is necessary 
to have a highly competitive market environment Avith large numbers 
of buyers and sellers. But the assembly of buyers, sellers, and products 
at a single exchange point is costly and inefficient. The implications 
are clear : develop a market system centralizing the process of negoti- 
ating trades; allowing products to move directly or nearly so from 
seller to buyer; and accessible to buyers and sellers wherever they are. 

How can this be done ? It's not difficult if the products can be de- 
scribed in terms meaningful to both buyers and sellers. This allows 
trading without personal inspection by the buyer. Description selling 
is not new, and grades and standards facilitating it exist for most 



1 Professor, Department of Agricultural Economics, Ohio State University. 

' Professor, Department of Agricultural Economics, Purdue University. 

3 Professor, Department of Agricultural Economics, University of Nebraska. 

(9) 



10 



agricultural commodities. What is new, or at least relatively so, is the 
technological capability to centralize description selling in a way that 
is easily and readily available to all potential traders, regardless of 
their location. This is where modern electronic comnnmications and 
computer technology can be directly applied to marketing. 

Electronic Trading 

AVliile there are many variations electronic markets can take, they 
all follow the same general model. Sellers describe their products con- 
sistent with standard grades. (Third party inspectors are used where 
grading is complex.) Grading can occur on the farm or at a local 
assembly point with similar products from different sellers com- 
mingled into truckload or carload lots prior to being offered for sale. 
Commingling may occur at a local assembly point prior to sale or "on 
par>er" for actual assembly after the sale, but prior to delivery. 

Offers to sell are disseminated to potential buyers at remote locations 
through two-way telecommunications. Through the same communica- 
tions medium buyers bid against each other until acceptable terms or 
a stalemate is reached. Offers to sell can be negotiated with buyers 
auction style, with or without a minimum "No Sale" price being estab- 
lished by the seller, or can be offered at firm prices, with buyers select- 
ing among available offers. Conversely, buyers can first present buy 
orders with sellers subsequently offering products competitively to fill 
the orders. After a sale is negotiated shipping arrangements are made, 
either directly to the buyer or through an assembly point. 

Variations in this general model include the use of different com- 
munications media and methods of negotiating sales, frequency of sales, 
and geographic and commodity coverage. Telephones and teletype are 
the major communications alternatives. Sale frequency can range from 
continuous throu,<?h daily or weekly to special sales scheduled on an 
"as needed" basis, depending upon the commodity. For example, 
slaughter hogs might be traded on a continuous basis, eggs daily, lambs 
weekly, and feeder calves on a special fall-spring schedule. To date, 
most electronic markets are limited to single commodities because of 
the rather unique requirements of each, although multiple commodity 
systems are conceptually feasible and might develop in time. Single 
systems could be established to serve local, regional, national, or even 
continental markets. Clearly, the larger the market the greater the 
competitiveness, but also the greater the development and operating 
costs. 

Methods for negotiating sales range from relatively simple to 
complex. 
They include : 

^lanual tradinghouses, w^here market personnel match tele- 
phoned bids and offers. 

Teleplione auctions, where offers-to-sell are auctioned via a con- 
ference telephone connection to potential buyers. 

Teletype auctions, where sellers' consignments are listed on a 
teletype network of potential buyers, then offered at a steadily 
declining price until a buyer activates the "Buy" key on his tele- 

Computerized tradinghouses, where traders communicate direct- 
ly with a computer via telephone and/or teletype. The computer 



11 



accepts, compiles, and stores bids and offers, and completes trans- 
actions by matchino^ bids and offers. 
These electronic markets vnry dramatically in complexity and ca- 
pacity. The choice depends upon the conditions in a market : number of 
traders ; volume traded ; oreographical market coverage ; frequency of 
sales ; and resources available for market development. 

How AXD Where Electroxic Trading Is Used 

Several markets have evolved which facilitate centralized, remote 
access trading. Commodity futures markets are the best-known exam- 
ples. In these markets trading is centralized, but buyers and sellers can 
submit bids and offers from remote locations. Futures trading is a 
^;pecial case, usually concerned with a specific commodity grade, a 
limited delivery area, distant delivery dates, specified contract size, and 
speculative trading and therefore is not a satisfactory example of the 
potential applications of centralized remote-access trading. 

Recently, several market systems have been developed similar to 
those discussed above. These vary in commodity, geographic area, as- 
sembly and grading procedures, as well as in methods of operation. 
They all allow remote access by traders to centralized trading, and 
result in direct or nearly direct shipping from sellers to buyers. These 
systems do not cover all possibilities, but do 2:)rovide insights into how 
such markets can be organized. Some examples merit a closer look. 

Moonual trading'houHes. — This is best illustrated by the Egg Clear- 
inghouse, Inc. (ECI) of Durham, New Hampshire". ECI was estab- 
lished primarily by egg producers to fill the need for a competitive 
price discovery mechanism. It is a manually operated telephone clear- 
inghouse which accepts bids and offers, and matches trades betAveen 
members anywhere in the 48 contiguous states. Trades are made on 
gradable nest-run eggs, with quality and weight specified for each lot 
based upon a test sample. Direct delivery is arranged once the trade 
is completed. Price information is disseminated based upon ECI trad- 
ing. Trading on the present basis began in 1971 with volume building 
slowly. During 1975 an average of 30,000 cases per month was traded. 

Telephone auctions. — Probably the most popular of the electronic 
selling methods used in the United States to date is the telephone auc- 
tion, or ''teleauction". The Virginia Tel -O- Auction, first developed in 
1962. is apparently the oldest. Originally established for marketing 
slaughter hogs and feeder pigs, it has since been used for slaughter 
cattle, feeder cattle, and market and feeder lambs. The feeder-pig and 
market-lamb auctions have proved the most popular, with about 
400.000 pigs and ^)0,000 lambs sold in 1975. There are successful feeder- 
pig teleauctions in at least seven other states, accounting for a total 
volume exceeding 1 million head per year. Teleauctions are being con- 
sidered or developed by producers in several areas, with most interest 
focused on market lambs and feeder cattle. 

These markets are very similar. They all utilize conference tele- 
phone calls for simultaneous two-way communications between an auc- 
tioneer and widelv separated bidders. Conference calls are generally 
limited to a maximum of 15 separate locations, thus some markets 
require that several buvers meet at a common bifldinrr location while 
otliers allow individual connections for each bidder. All 'ell on the 
basis of grades or standards. Some assemble and commingle livestock 



12 



at local yarxls prior to the salo, while others inspect the livestock on the 
farm prior to consio-nment and physically assenil^le buyers' lots after 
the sale. Generally, when livestock is sold on-farm, buyers can choose 
any delivery date within a specified period following the sale, and 
sellers often can elect a "A^'o Sale" price. 

Use of these markets has been voluntary, and they have become 
important local market alternatives where'they exist. Their sionifi- 
cance with respect to the total market, however, has not been ^reat. 

Teletype Perhaps the most successful of the electronic 

sellino- methods to date has been the teletype auction, used extensively 
and almost exclusively for .marketino- Imtcher hoo-s in Canada. The 
first market was developed by the Ontario Hoo^ Producers Marketino- 
Board in 1961 and has since been adopted with some modification in 
Alberta, Manitoba, and the Maritimes. These have been established 
by producer referendum, and their use is essentially mandatory with 
limited by-pass possible. About 75 percent of Canada's hoos are sold 
through these markets. 

Teletype auctions are very similar to telephone auctions. The major 
differences are that eacli buyer has his own direct teletype connection, 
thus greatly expanding trading capacity ; and that typically, a Dutch 
or regressive auction is used rather than a progressive or English 
auction, thus accelerating the selling process. As wdth the teleauc- 
tions, standard grades are used. Some provincial systems assemble hogs 
prior to sale, while others sell prior to assembly. Xo application of this 
system has yet been made in the United States. 

G omqmteinzed tradlnghouses. — This is one of the more innovative 
of electronic marketing methods and offers almost unlimited trading 
potential. Computers can handle vast amounts of information very 
rapidly and facilitate direct trader interaction with conventional tele- 
type terminals, TV-like cathode-ray terminals, and verbal telephone 
responses through "talking computers." These markets function much 
like manual trading-houses, but wnth significantly greater capacity. 
Truly national or even continental markets are feasible. 

To date one computerized trading system has been developed for 
a<2:ricultural commodities, TELCOT, operated by the Plains Cotton 
Cooperative Association (PCCA) in Lubbock, Texas. On TELCOT 
cotton buyers are interconnected to the exchange via cathode-ray 
terminals. Sellers place their offers and minimum acceptable price on 
the market by contacting a PCCA operator via a WATS telephone 
call. The offers are then entered into the TELCOT computer that dis- 
seminates them over the network of buyers' terminals. Buyers submit 
bids to the computer via their terminals, and the computer accepts 
the highest bid submitted within a specified bidding period — usually 
15 or 30 minutes — depending upon the volume of trading. If the high- 
est bid is below^ the seller s minimum offer price no transaction occurs. 
If the bid is satisfactory delivery is arranged after the sale with the 
computer handling the' paperwork. Trading and price information 
is available to aU tradei's. Proposals for similar systems have been 
developed for eggs, slaughter hogs, and feeder cattle. 

The brief descriptions, though understated, are illustrative of ac- 
tual electronic marketing systems, and pi-ovide a basis for evaluating 
the conditions under which such systems can be successful and the 
resulting market performance. 



13 



The Necessary Elements eor Success 

Several conditions appear to be important to the success of elec- 
tronic markets for ao-ricultural commodities. These include character- 
istics basic to the commodity or industr3^ plus conditions established 
by the design and operation of the electronic market itself. Some of 
the conditions necessary for successful implementation must pre-exist 
within the system. 

PofentiaUy competttive mai-kefs, — Electronic marketing appears to 
be ideally suited to situatioiis where there is an imbalance in market 
power between buyers and sellers, providing the powerful side accepts 
the system. But the potential for a competitive bidding process must 
exist. Such systems offer few advantages in situations where a single 
seller or buyer dominates. 

Trader interest. — Traders must perceive a need for a more competi- 
tive market, be willing to trade on a description basis, abide by their 
commitments to buy or sell, and have confidence in the system. Re- 
duced personal contact with marketing intermediates may render 
trader interest difficult to maintain. 

Accurately describahle commodities. — Products to be traded must 
have characteristics that can be accurately described in terms mean- 
ingful to buyers and sellers. Too, commodities traded should be capa- 
ble of maintaining a relatively stable condition from the time they are 
described and offered for sale to the time they are delivered to the 
buyer. 

High voluvie. — Commodities must be produced, bought and sold in 
relatively large quantities, and traded on a frequent basis in order to 
provide market liquidity and interest. This suggests that such sys- 
tems might not be compatible where production and distribution are 
highly integrated. 

In addition, the following conditions should be created within the 
marketing system in order to achieve successful implementation. 

Trader edumtion. — Electronic selling is complex and foreign to 
most potential traders, thus an educational program is essential to 
help people better understand the potential benefits associated w4th 
electronic markets and the mechanics of trading. 

Performance guarantees. — To achieve trader confidence and fiscal 
integrity it is necessary to assure that traders perform as promised. 
Contracts between the market agency and traders, bonding, and penal- 
ties for misfeasance are ways to accomplish this. 

Grading systems. — Development or adoption of meaningful grades 
and standards and a method for third-party inspection is essential to 
assure market integrity and clear communication among traders. 

Large volume trading. — Not only is the potential for high volume 
needed, the market must achieve it. Large volume is essential to achieve 
an accurate price and efficient trading. This may require mandatory 
trading, as in the Canadian systems, at least on a specified percentage 
of each buyer's or seller's business. 

If the above conditions exist or can be established, an electronic 
exchange system may be feasible. A market organization would have 
to be established, a selling method selected that best fits the industry 
characteristics, and the actual mechanism developed to facilitate trad- 
ing. But then, it must be asked, is it worth the cost and effort ? 



14 



Anticipated Results or Electronic INIarketing: Gains a?7d Tosses 

Several potential benefits can accrue to buyers and sellers, to others 
in the industry, and to the public in general from the use of electronic 
nuirketing methods, provided the necessary conditions for successful 
()l)eration are met. Likewise, there are some potential costs, or limita- 
tions. Some of the relevant performance criteria include pricing ac- 
curacy, market coordination, marketing efficiency, equity and fair- 
ness, and societal gains. 

Pricing accuracy is a measure of how well prices reflect the broad 
spectrum of supply and demand forces at the time of trade. Probably 
the greatest single advantage of remote access electronic markets is 
tlieir ability to centralize price negotiations of very large quantities. 
Tliis creates a price determination process that accurately reflects the 
actual market conditions at the time of trade. Conceptually, the poten- 
tial for accurate prices is greater in electronic trading than in any other 
system. It does not generate stable prices, per se, but it does maintain 
a system of fluctuating prices which helps assure price changes reflect 
actual market conditions. 

To the extent tliat electronic trading would help create larger p'oo- 
graphical markets, the process of arbitrating prices between various 
areas in the country is greatly enhanced. Geooraphical price differ- 
ences not justified by transportation or quality differences would 
quickly disappear. Furthermore, centralized trading enhances the col- 
lection, dissemination and accuracy of information on prices and other 
market conditions. Superior information may be one of the most im- 
portant results. As such, it could replace many existing information 
services, both public and private. 

Market coordination refers to how well resources are allocated among 
the multitude of industries and firms contributing to a given consum- 
able product, relative to the ultimate demand for that product. The 
major advantage of electronic markets in this area stems from the im- 
proved communications between buyers and sellers about desirable 
product characteristics that results from the use of product grades and 
standards. This is not unique to electronic selling, but certainly is en- 
hanced because of the importanee of accui'ate product description in 
these markets. Product qiuility should improve, as a result, as prices 
more accurately reflect quality/value differences. Furthermore, it could 
enhance coordination among non-users, if any, by providing an im- 
proved base for determining transfer prices. 

On the negative side, there is nothing inherent in an electronic mar- 
keting system that would reduce uncertainty about future market con- 
ditions. And, if mandatory, it would preclude the use of non-price co- 
ordination practices, such as contracting and vertical integration, that 
mav be used to reduco eosts or facilitate merchandisiuio: programs. 
Additionf)llv, art inflexible and unproo-ressive industry could result if 
grades and standards become overly rigid. 

Marketing efficiency concerns performance of the marketing job at 
the lowest cost. The potential to reduce marketing costs is crreat if a 
large volume covering a wide geographical area is handled. More nearly 
direct seller-to-buyer movement of the pi'oduct can be achieved because 
the sale is neijotiated and the ultimate destination determined before 
it leaves the farm or assembly point of origin, thus transportation, han- 
dling, and assembly costs can be minimized. 



15 



Collecting market information is less costly because the price nego- 
tiation process is centralized. Timing of deliveries can be easily ad- 
justed to more closely fit the buyer^s needs, thus increasing his opera- 
tional efficienc}^ Remote access reduces the time and costs for buyers 
and sellers to negotiate trades. Transaction costs may be reduced be- 
cause selling can be concentrated in a single organization, reducing 
duplication of facilities and services. Smaller market facilities are 
needed because physical accommodations for traders aren't necessary 
and, when on-farm selling is used, shipments can be spread over sev- 
eral days. 

Contrariwise, some existing markets would become obsolete. And, 
if the system was voluntary, it might ])rimarily attract higher quality 
products, forcing lower quality goods into more costly market channels. 

Equity and fairness. — An important feature of remote access mar- 
kets is the "equalizing" of traders' power — the ease with which traders 
can enter the system — and the high degree of competitiveness that ob- 
tains. Sellers' equity can be improved markedly compared to local 
markets dominated by one or two buyers. Experience Avith the Virginia 
lamb Tel-O-Auction, for example, has demonstrated a 6-10 percent 
price advantage for sellers primarily because of more competitive 
bidding. 

With on-farm selling products don't have to move to a market to be 
offered for sale, thus increasing sellers' control over Avhen-to-sell deci- 
sions. Small traders are on more even ground vis-a-vis their larger 
counterparts through actual or on-paper commingling and direct 
access to other traders. Performance guarantees enhance the integrity 
of the market, and opportunities for exclusive dealin.os are reduced^ — 
eliminated in mandatory systems. Local monopolistic traders, of 
course, would lose their economic advanta'n\ 

Social consequence is an assessment of the net economic gain or loss 
to societ}^ resulting from a chana"e such as the adoption of a new mar- 
keting method. This evaluation suggests a successful electronic market 
would result in more efficient use of economic resources by lowerinp- the 
costs of buying, selling, and transportation. Improved coordination 
means resources would be used for more nearly optimal purposes. And 
economic power would be more evenly distributed. Theoretically, all 
segments of society benefit from economic gains in any part of the 
economy. How such gains would actually be distributed among people 
is a complex and difficult question to answer, and be3^ond the scope of 
this analysis. 

Implemextation of Electroxic INIarketixg Systems 

If the merits of electronic markets are deemed worthy and the con- 
ditions for success feasible, how can one be implemented? Most im- 
]:)ortant are commitments bv potential tradei'S to use it and by someone 
to finance its development. Start-up costs are high, and volume trading- 
is essential. 

There are two basic alternatives for gaining these commitments — 
voluntarily and by mandate. Voluntarily, producers and/or buyers can 
organize, develop a workable model fitting their product characteristics 
and geographical area, gain contractual commitments from enough 
traders to assure a reasonable chance of success, then interest a new 
or existing market agency in providing the service. 



16 



There are several alternatives for gaining a mandatory or quasi- 
mandatory system. Potential users could seek a governmental or insti- 
tutional grant to finance development and subsidize the initial oper- 
ation. Legislation could be sought enabling a government agency to 
develop and operate the system, authorize a marketing board to de- 
velop it, and mandate its use if approved by a vote of producers; or 
market order legislation could be amended to order such a market for 
at least a specified percentage of all trades. 

To date, the most successful electronic markets have been the 
Canadian hog markets, mandated by law. Conceptually, voluntary 
markets are feasible. Some are already in use on a limited scale. Real- 
istically, some mandated use may be necessary to achieve sufficient vol- 
mne for maximum benefits. Given the "public good" nature of the im- 
proved information and other benefits that would accrue, mandatory, 
or at least quasi-mandatory, use and government subsidization may be 
justified. 

SELECTED BIBLIOORAPHY 

Forker, Olan D., "Price Determination and Processes : Issues and Evaluation." 
U.S. Department of Agriculutre, Farmer Cooperative Service Information Bul- 
letin 102, September. 1975. 

Hawkins, M. H., et al., "Development and Operation of the Alberta Hog Pro- 
ducers Marketing Board." The University of Alberta, Department of Agricultural 
Economics and Rural Sociology Bulletin 12, revised December, 1972. 

Holder, David L., "A Computerized Forward Contract Market for Slaughter 
Hogs." Michigan State University Agricultural Economics Report No. 211, Jan- 
uary. 1972. 

Johnson, Ralph D., "An Economic Evaluation of Alternative Marketing Meth- 
ods for Fed Cattle." Nebraska Agricultural Experiment Station Bulletin SB 520, 
June, 1972. 



FORWARD DELIVERABLE CONTRACT MARKETS 



(By Thomas L. Sporleder^ and David L. Holder^) 



IXTRODUCTIOX 

Modern technologies in production, processing, and distribution of 
food and fiber require coordination of numerous activities within and 
among firms before potential efficiencies can be realized. As a result, 
many agricultural and related firms are turning from conventional 
spot-market transactions to contracts as a means of buying and selling. 
With quality and quantity already determined, spot-market trans- 
actions are based largely on price and are made on a day-to-day basis 
as a product is available for delivery. Contract transactions, usually 
initiated by processors, are for longer term commitments, made prior 
to product delivery, and often before production begins. Contracts may 
specify volume, acreage, planting or breeding dates, variety of seed 
or breed of livestock, husbandry practices, quality factors, time and 
method of harvest, and timing of delivery to the processor. The proc- 
essor is thus able to minimize processing costs and achieve a high 
degree of quality control. Contracting is expected to become more 
widespread in years ahead. It is a potential means to develop better 
coordination between production and market demands and thus im- 
prove efficiency in the food and fiber industry. 

Price is often but not always specified or agreed upon at the time 
of the signing of the contract. It is the problem of price or value 
determination which is at issue in this paper. Often contracts are nego- 
tiated in secret. The farmer sometimes has little information on cur- 
rent, let alone future, market conditions. The free market forces 
normally at play in the determination of prices or value cannot surface 
or be expressed. Thus, the process for short run price or value determi- 
nation for the commodity being contracted is imperfect. This paper 
describes and evaluates the probable performance of the concept of 
a forward deliverable contract market, hereafter referred to as FDCM, 
as one solution to the problem of lack of competition in price deter- 
mination for forward contracts. 

A Defixitiox of FDCM 

Comparison with fafures m-arkets. — In some respects a FDCM 
would resemble a futures market. It would be a market for a contract 
but in the case of the FDCM the contract would be between the person 
who would deliver the product and the person who would actually 
plan to receive it. Both types of markets consist of an open market 



1 Professor, Department of AgrlcuUiiral Economics. Texas A&M University. 
'Agricultural Economist, Farmer Cooperative Service, U.S. Department of Agriculture, 
Washington, D.C. 

(17) 



18 



oxcliango wlicro biiyoi'S and sellers from till parts of the nation, even 
the world, trade standai'dized conti'acts for future delivery. The con- 
tracts specify tei'nis of sale, e.g.. quantity and (juality specifications, and 
time and place of delivery, and are traded at a base price with speci- 
fied premiums and discounts for (piality variations from a specified 
base. 

The major difference^, between a FDCM and futures market would 
be that the FDC^M contract specifies and assumes delivery. Although 
the futures contract specifies delivery, delixery does not usually occur. 
A high pei'centage of deliveries reduces the usefulness of a futures 
market since it is designed to- facilitate forward pricing through hedg- 
ing and speculation."^ The futures market is therefore not designed to 
facilitate delivery. In most cases it is difBcult for a processor to pro- 
cure raw agricultural commodities through the futures market. 

The whole purpose for FDCM, on the other hand, is to create a 
market for contracts that would facilitate delivery by creating a multi- 
plicity of delivery points and offer a variety of standardized contracts 
for a single commodity in each delivery month to meet varied needs 
of a large number of processors. FDCM would grant processors the 
option of specifying time and place of deliver3\ FDCM would not be- 
come a ])arty to each contract as a clearinghouse in futures markets, but 
would immediately and directly pair the buyer and seller when the 
contract was executed so that delivery could be made. 

Producers and processors would probably enter FDCM directly, 
without the services of a broker. In futures markets the broker, initial 
margin, and variation margin are used to enforce contracts; in FDCM 
certified financial strength and integrity of producer and processor, as 
well as various penalties for noncompliance, would be used to enforce 
the contract. Certification, as well as a variety of allowable contract 
conditions, deliveiy points, and ])airino- of individual buyers and seli 
ers at the beginnin.g of a contract would make FDCM unattractive to 
speculators who would probably continue to be attracted to futures 
mai'kets. 

Production and marlcetmg contracts. — FDC^I could be designed to 
handle either production or marketing contracts. Production con- 
tracts — made for a specified period befoi-e production begins — would 
emphasize quality, specific cultural practices, marketing and delivery 
procedures. Marketing contracts — traded after production begins — 
would be limited mainly to S])ecification of quality, quantity, and tim- 
i]io- of deliveries. Price would be determined through participation in 
FDCM. 

Pricing and transactions. — There are four alternatives for tradinof 
and thus determining the price of FDCM contracts : a computerized 
matching of producer offers and processor bids ; a telephone exchange ; 
a teletype auction ; and a "trading pit'-, as used in most futures markets. 
Given the technology already available, a centralized exchange, man- 
ual or computerized, has the greatest potential for improving pricings 

•■'Tlolbrook Working. "Futures Tradinc: and Hedarinjr." American Economic Review, 
June 19r)8, p. 315. T. A. Hieronymus, "The Desirability of a Cattle P'utures Market," un- 
published paper, n.d. 



19 



and operational efficiency. Modei-n tec]inolo«:>y in telecommunications 
and computers makes it technolo^-ically possible to have one central- 
ized market for the entire I'nited States, or even the world. 

Access to the computer could be <?ained by touch-tone telephone units 
located in the offices of most traders. (Teletype or television-like equip- 
ment could also be used by hio-h-volume traders.) A producer could call 
the market computer, receive an up-to-the-second market report, and 
enter information about the commodity he wished to sell, including 
his offering price. The comjniter would process the oti'er by searching 
for a similar or higher bid f I'om a processor. 

If a satisfactory buyer's price was found, the sale would be con- 
firmed and both parties notified at once. If no bids were available at 
the desired price, the producer's offer would be placed on file to await 
a higher entry by a processor. If no higher bids were made within a 
desired period of time, the producer would have to adjust his price 
downward in order to make a transaction. Both buyers and sellers 
would adjust bids and offers until an acceptable match was found. 

The FDCM would keep accurate records, prepare all necessary 
paperwork for sale confirmation, title transfer, and transfer of funds. 
Manpow^er requirements of a computerized FDCM would be relatively 
low but equipment costs relatively high. A large volume of trades 
would be necessary to keep down per-unit transaction costs. A small 
volume FDCM could use a manual matching process. 

Since FDCM would operate over a broad geographic area, provision 
could be made to automatically adjust all bids and offers for a trans- 
portation differential from origin to destination. Such an automatic 
adjustment would expand significantly the potential trading area of 
buyers and sellers. However, FDCM would not be expected to dramati- 
cally change the physical movement pattern of most commodities. Most 
production would still tend to go to processors in the immediate area 
of production to minimize transportation costs. 

The Applicabilitt or FDCM 

Contracts, as used by processors and producers, are used to specify 
quality to improve quality control ; to specify and improve scheduling 
of activities in production, processing, and distribution ; and to reduce 
price risk or transfer price risk from one party to another. A FDCM 
would be a means to formalize the process of contract negotiation and 
broaden the range of competition over the terms of the contract and the 
price. It Avould be applicable to any subsector now using contracts, such 
as vegetables or fruits for processing or sugar beets (Table 1). Even 
though extensive contracting does not currently occur in hogs, cattle, 
sheep, eggs, or turkeys, a FDCM might offer an opportunity to im- 
prove coordination for these commodities. FDCM appears much less 
applicable to commodities such as food and feed grains where the prod- 
uct is not perishable and the market channel from producer to processor 
includes several types of firms that handle the product. 



20 



TABLE 1— ESTIMATED PERCENTAGE OF OUTPUT PRODUCED UNDER PRODUCTION CONTRACTS AND 
UNDER VERTICAL INTEGRATION, UNITED STATES, 1960 AND 1970 

(In percent] 



Production contracts Vertical integration 



Crop 1960 1970 1960 1970 



Feed grains 0.1 0.1 0.4 0.5 

Hay and forage... .3 .3 

Food grains 1.0 2.0 .3 "".'5 

Vegetables for fresh market 20.0 21.0 25.0 30.0 

Vegetables fof processing 67.0 85.0 8.0 10.0 

Dry beans and peas.. 35.0 1.0 1.0 10 

Potatoes 40.0 45.0 30.0 25.0 

Citrus fruits 60.0 55.0 20.0 30.0 

Other fruits and nuts 20.0 20.0 15.0 20.0 

Sugar beets 93.0 98.0 2.0 2.0 

Sugarcane 40.0 40.0 60.0 60.0 

Other sugar crops 5.0 5.0 2.0 2.0 

Cotton 5.0 11.0 3.0 1.0 

Tobacco- 2.0 2.0 2.0 2.0 

Oil-bearing crops 1.0 1.0 .4 .5 

Seed crops 80.0 80.0 .3 .5 

Miscellaneous crops 5.0 5.0 1.0 1.0 



Total crops 1.. 8.6 9.5 4.3 4.8 



Feed cattle 10.0 18.0 3.0 4.0 

Sheep and lambs 2.0 7.0 2.0 3.0 

Hogs .7 1.0 .7 1.0 

Fluid-grade milk 95.0 95.0 3.0 3.0 

Manufacturing-grade milk 25.0 25.0 2.0 1.0 

Eggs. 5.0 20.0 10.0 20.0 

Broilers 98.0 90.0 5.0 7.0 

Turkeys 30.0 42.0 4.0 12.0 

Miscellaneous 3.0 3.0 1.0 1.0 



Totallivestock items 1 , 27.2 31.4 3.2 4.8 



Total all items 2 15.1 17.2 3.9 4.8 



1 The estimates for individual items are based on the informed judgments of a number of production and marketing 
specialists in the U.S. Department of Agriculture. The totals were obtained by weighting the individual items by the relative 
weights used in computing the ERS index of total farm output. 

2 Final totals for production contracts and vertical integration were obtained by combining the total estimates for crops 
and livestock after adjusting for double counting of farm-produced feed crops consumed by livestock. As in the ERS 
index of total farm output, crops represent about of the final weight and livestock J-^. 

Source: R. L. Minghell and W. S. Hoofnegle, " Contract Production and Vertical Integration in Farming, 1960 and 1970," 
ERS-479, USDA-ERS, April 1972. 

Without a contract commitment with price specified before planting, 
the producer bears the risk of price changes during the production 
period; contracting with price specified shifts the risk but does not 
eliminate it. Of course, if the futures market has a futures contract 
on the commodity involved, a buyer or seller can offset a commitment 
in the FDCM market. 

Futures markets, currently functioning for many commodities, (Ta- 
ble 2), generally are active if there is an "active" spot market for a 
commodity. Active spot markets and futures markets are identified by 
a high ratio of imits traded per unit of production. If contracting and 
a FDCM would become common, spot-market and future-market ac- 
tivities would possibly decline. 

Some Examples 

A discussion of the economic consequences and potential applica- 
bility of the introduction of a FDCM where other producer-first han- 
dler exchange arrangements now exist will be used to illustrate the 
FDCM concept. Three commodities (tomatoes for processing, hogs. 



21 



and wheat) are chosen because they represent a broad array of com- 
modity and trading- characteristics. 

Tomatoes for Processing are seasonal, perishable, cannot be eco- 
nomically transported great distances from the production area, and 
have no active spot or futures markets. Contracts are now signed prior 
to production between processor and producer in private negotiation 
or through producer bargaining associations. 

FDCM would not represent a substantial departure from established 
exchange arrangements but would create an open market for contracts. 
Because of the commodity's perishability, a computerized system for 
trading production contracts most likely would be established in each 
major production area. Processors desiring to contract would choose 
one of several standardized contracts best suiting their needs and enter 
an offer to contract over the exchange. Price could be determined 
either by bid/offer or auction. All offers and actual transactions would 
be immediately and simultaneously available to both processors and 
producers. 

TABLE 2— LEVEL OF ACTIVITY IN FUTURES MARKETS AND SPOT MARKETS, SELECTED PRODUCTS 



Active futures Little or no activity in futures 



Active spot Grains Wheat, corn, soybeans, oats, barley,! rye,' Fresh fruits: Apples, peaches, pears, grapes, 

rapeseed,! flaxseed.! oranges, watermelon, plums, apricots, grape- 

Processed products: Soybean oil, soybean meal, fruit, 
pork bellies, boneless beef, orange juice, iced Fresh vegetables: Lettuce, carrots, cucumbers, 
broilers, coffee, cocoa, sugar. peppers, onions, celery, sweet corn. 

Livestock: cattle, hogs. Other: Nuts, fish, sheep, W00I.2 

Other: Cotton, potatoes. 

Little or no Fruits for processing: Cherries, peaches, pears, 

activity in tomatoes. 

spot. Vegetables for processing: Peas, snapbeans, sweet 

corn. 

Other: Broilers (live), sugarcane, sugar beets, 
milk, eggs,2 seed crops. 



1 Vancouver. 

2 Only commodities in "little or no activity" in futures with futures markets actually operating. 

Slaughter Hogs are produced throughout the country and marketed 
continuously throughout the year on a spot basis when hogs are ready 
for slaughter. Many Hogs move directly from producer to packer, a 
method of marketing that is increasing as production units become 
large enough to ship in truckload lots. The majority of hogs still moves 
to packers via dealers, agents, and public markets. Contracts are cur- 
rently used for only about one percent of all hogs sold. 

If a FDCM were in existence, production or marketing contracting 
might expand. In an FDCM contract quality specifications could be 
in terms of measurable carcass features such as weight, length, and 
backfat thickness. Prices of contracts could be negotiated in terms of 
a base carcass of specified weight, length, and backfat. Enough dif- 
ferent contract specifications could be used to permit trading on the 
market to determine the value of the major product characteristics. 
Carcasses that varied from the base within each contract category could 
be priced according to a pre-established premium-discount schedule. 
The premium-discount schedule would have to be revised occasionally 
as comparative values changed. To satisfy the demands of a large num- 
ber of packers having different carcass specifications, two or three 



standardized contracts witli ditlVront bases could be olFered for bar- 
rows and <2;ilts and an additional contract for slau<rliter sows. 

Carcass tradino- Avould iin[)rove j)riciiii): efficiency by paying for hoirs 
accordinfj: to the value of each carcass sold, would serve as a direct in- 
centi\ e for producers to produce what the market demands, and would 
facilitate direct n]ovement fi'om producer to packer by eliminatin<>: 
live weiijhino:. 

A sin<j:le FDC^I for slau<2:liter ho^s could handle all transactions 
Avithin the United States. The results of such widespread use would 
be more competitive and accurate pricinir. and price certainty for pro- 
ducei's beirinnino- when the contract is entej'ed. Improved scheduliufr 
of ho<>:s from farm to plant would i-educe daily, seasonal, and cyclical 
o-luts and scarcities and tlieir eft'ects on marketiuir and processing 
efficiency. 

Wheat is marketed worldwide. The commodity is produced season- 
ally, is storable, and can be economically transported lone: distances 
from production areas. There are domestic and world spot mai-kets as 
well as active futures markets. Producers rarely place their crop under 
production or marketin<2: contracts. Unlike the maiketing channel for 
either tomatoes for processing or slaughter hogs, the channel for 
wheat includes numerous businesses between producer and miller. 
These businesses engage in storing, risk-bearing, assembling large quan- 
tities, and transporting wheat to export mai'kets or domestic millers. 
In this process, ownership may pass through agents, brokers, coopera- 
tives, or large grain-handling firms. 

Use of FDC^I for wheat would be a radical departure from the cur- 
rent spot market arrangement, and exclusive use of FDCM is not likely 
because of the complex nature of the distribution system for the com- 
modity. In food and feed grains, three or four pricing points exist 
prior to the processor or export market, while for most fruits and 
vegetables for processing only one pricing point exists between produc- 
er and processor. For wheat, pricing points exist at the local eleva- 
tor, terminal elevator, and miller or export level. Because of this, posi- 
tioning of the FDCM most likely would be just prior to the miller 
or export level, rather than the producer-first handler level. FDCM 
for wheat probably would not be addi'essed directly by a producer but 
rather by his cooperative, terminal elevator, or a large grain-handling 
firm. 

Even if FDCM w^ere operable at this level for feed or food grain, 
only modest o]:>erational or technical efficiency could be expected com- 
pared with the current, primarily spot market, transaction system. At 
best, FDCM for wheat would have only little net benefit for producers. 

Expected Ecoxomic Coxsequexces of FDCM 

Operational and pricing efficiency. — Efficiency in marketing is of 
two types : operational efficiency, which refers to how^ efficiently various 
physical activities — processing, storing, transporting, grading, and 
packing — are conducted ; and pricing efficiency, which refers to the ac- 
curacy and speed with wdiich prices are reflected to and among par- 
ticipants in a marketing channel. For example, if accurate informa- 
tion concerning supply and demand conditions is not readily and 
equally available to all participants in a marketing channel, then 
price may not be accurate. Or, if mechanisms do not exist to readily 



23 



reflect new market conditions, price may be accurate but not avail- 
able in time to have an appropriate influence on production or market- 
ing decisions. Either of these cases could result in "inefficient" pricing. 

A FDCM for production or marketing contracts could improve 
operational efficiency by enabling better coordination in production 
and processing activities. It could also and more importantly improve 
pricing efficiency by expanding or increasing the exposure of potential 
producers (sellers) and processors (buyers) to each other. 

For the processor who relies on contractual arrangements rather 
than spot-market purchases for raw-product procurement, some in- 
crease in production efficiency would be expected as more control over 
quality, quantity, and timing of deliveries could be gained. As a result, 
more efficient use of plant, equipment, and labor would be realized. 
Processors may gain some efficiency in merchandising their output 
because they could assure more uniform quality input. All these 
effects would be expected to lower long-run average cost for proces- 
sors through the ability to better coordinate and allocate resources 
necessary to produce a given output. 

In comparison with spot markets FDCM could provide several 
improvements in exchange efficiency. FDCM could be a high-volume 
exchange system that would centralize transactions over a broad geo- 
graphic area. Physical handling within the FDCM system would be 
separated from transaction activity and in many cases handling could 
be reduced as more direct shipments from producer to processor would 
be encouraged. Commodities that still required handling and assembly 
prior to delivery could be scheduled to meet buyer needs. Scheduling 
deliveries could be arranged to minimize assembly time, labor, shrink, 
and need for facilities. 

FDCM could conduct all transactions electronically and all trading 
would be on a description basis. The need for each potential buyer to 
travel to low- volume sales markets or to individual sellers and visually 
inspect the commodity would be eliminated. Travel expenses and the 
number of buyers employed by each processor could thus be reduced. 
FDCM could also reduce the need for brokers, merchants, and other 
handlers often used to bring buyers and sellers together. 

Procurement decisions made several months in advance of delivery 
would require the processor to do some advanced planning which 
does have a cost. The processor would also face new uncertainty in 
forecasting and meeting future needs. However, processors should be 
in a better position than producers to make these decisions because of 
superior market intelligence of product markets. 

Both producer and processor could save by completing transactions 
quickly and at low cost in a computerized trading system. The actual 
operating costs of a FDCM could be less than exchange costs of spot 
transactions. For example, Holder estimated the cost of pairing buyers 
and sellers at about $1.10 per head in terminal market transactions for 
hoofs.* For auction markets, costs are estimated between 65 to 80 cents 
per head, while transactions in local dealer markets cost about 35 to 
55 cents per head. In contrast, a computerized forward contract mar- 
ket, similar to FDCM, was estimated to have an exchange cost of 

"•Dflvid L. Holder. "A Computerized Forward Contract Market for Slaughter Hogs," 
Aer. Econ. Rpt. No. 211, Dept. of Agricultural Economics, Michigan State Univ., Jan 1972. 
pp. 51-54. 



67-134 — 76 3 



24 



40-45 cents per head on an annual volume of 5 million head, 20-25 
cents on 25 million head, and 15-20 cents on 50 million head. 

Whether or not coordination of supply and demand at the producer- 
first handler level would be substantially improved depends on several 
circumstances. If the FDCM was not an exclusive market and traded 
only marketing contracts then little improvement would be anticipated. 
If the FDCM was an exclusive producer-first handler exchange mech- 
anism and all contracts were made prior to production, then supply 
and demand would be significantly moi-e coordinated than under spot 
market conditions. The improved coordination could significantly re- 
duce processing costs. In addition, the operating efficiency of FDCM 
would put downward pressure on marketing costs. 

FDCM would significantly increase the amount of information on 
market conditions compared with dispersed spot markets or private 
treatey contract negotiations. Comparison of prices over quality, quan- 
tity, location, and time would be facilitated. Market reports generated 
from a FDCM would be more timely and accurate because they would 
be more up-to-date and more broadly based and because price quota- 
tions would be for specified quality and terms of trade. 

Price could more effectively communicate supply and demand con- 
ditions through FDCM. Allocation of available supplies of each 
quality among various demands by processors could be more system- 
atic. Also, because the FDCM would generate an array of prices — one 
for each future delivery time — producers would have more informa- 
tion regarding the most profitable delivery time. The broader geo- 
graphic area over which FDCM would operate should mean that price 
differences among geographic areas more nearly reflect the differences 
due to transportation cost only. 

Competition^ market poiver^ and market access. — The presence of 
many sellers (producers) and few buyers (processors) in most local 
spot markets enhances the opportunity for buyers to exert downward 
pressure on prices paid for a commodity. In contrast, FDCM would 
expose each producer's offer to many buyers, thereby increasing compe- 
tition among buyers and decreasing their aggregate market power. 
Thus, in FDCM, producers should gain market power relative to proc- 
essors simply by increased competition. For commodities that cur- 
rently have solely a spot market at the producer-first handler level, 
FDCM would represent an additional market or alternative. 

Market access is the ease with which buyers or sellers can partici- 
pate in a market and the availability of alternative markets in which 
to participate. Producers and processors would both have an initial 
difficulty in entering FDCM because the reliability of the seller and 
the credit worthiness of the buyer would have to be established prior to 
participation. Once a new participant's status was verified, however, 
access would be easy. 

Allocation of rhk. — Both producers and processors are likely to con- 
sider the new risks assumed under contracting to be greater than the 
risks avoided. Producers would have less price risk by contracting 
through FDCM than selling on spot markets because FDCM would 
allow price to be known and assured prior to a production decision. 
However, quality, quantity, and timing risks would arise because non- 
price terms of the contract would have to be met. One strategy of pro- 



25 



ducers might be to produce more product than demanded by the 
contract. 

Processors are relieved of quality, quantity, and timing risks, but 
assume price risk. Processors might use a number of methods to elimi- 
nate or reduce price risk. First, processors could hedge in futures mar- 
kets for the input purchased on contract through FDCM and transfer 
price risk to professional speculators. Second, processors could hedge 
in futures markets for finished products they are producing. Other 
product futures markets could be developed as needed by the trade. 
Third, with assurance of input supply through FDCM, processors 
would have an opportunity to make forward contracts with whole- 
salers and retailers. Fourth, an options market, similar to the options 
market for corporate securities, could be developed to parallel FDCM. 
A processor buying a contract in FDCM could offset his price risk by 
buying an option to offset the contract. The option might have to be in 
the product market as options in raw products would require a paral- 
lel spot market to permit option writers to honor their contracts. Fifth, 
price insurance is another possibility, but again it might have to be 
on the finished products if raw product prices do not exist. An "in- 
surer," in this case largely a speculator, would guarantee the processor 
a minimum selling price. The insurance premium would reflect the 
probability of a price decline and resulting claim against the insur- 
ance underwriter. 

Extermal effects. — Spot markets might decline as contract markets 
such as FDCM increase in use. Spot markets would become a ''resid- 
ual quantity market'' if a major portion of the total production of a 
commodity was contracted. This could result in wide price swings in 
the spot market because price would depend on the supply of and 
demand for the residual noncontracted production, potentially highly 
volatile over time. Also, the per-unit costs of using spot markets could 
increase as the volume of transactions declined. 

The impetus for ownership through vertical integration by proc- 
essors into production may be reduced by having FDCM as an alter- 
native to the spot market. Contracting, as already described, allows 
processors to closely coordinate delivery of quantities of specific qual- 
ities with processing plant needs. If existing spot markets now lead to 
backward ownership integration, this movement could be met and 
overcome through contracting. 

Effects on consumers. — Consumers could ultimately benefit from a 
shift in transactions from spot market to FDCM. The absolute amount 
of benefit would depend upon per-unit cost sa\'ings by FDCM. the ex- 
tent of FDCM use within a particular marketing channel, and the 
extent of market competition at all other levels within the marketing 
channel. If a competitive environment exists throughout the market- 
ing channel for a commodity, then consumers Avould benefit from lower 
transfer and processing costs that accrue through use of FDCM at the 
producer-first handler level. Lower costs at this level would lower retail 
prices by some lesser amount. 

Consumers could benefit from increased pricing efficiency realized 
through quality premiums and discounts used in contracts because 
they would more accurately signal price differentials for qualities 
most demanded by consumers. Eelative to the spot market, FDCM 



26 



could more directly reflect consumers' quality desires to processors 
and producers. 

FDCM could enable buyers and sellers to price commodities before 
production rather than at the time of delivery to a spot market. When 
prices are determined after production, they are partially a residual of 
quantity produced rather than a cause of the quantity produced. If, 
through FDCM, production cycles could be dampened, prices at all 
levels within the marketing channel would be more stable. 

Implementation 

FDCM could be established by existing commodity exchanges as a 
new formalized forward-selling technique that would parallel and 
possibly replace traditional raw product futures markets. The ex- 
changes have the advantage of experience in establishing and operat- 
ing contract markets, but they also have a strong vested interest in 
futures markets whose clientele and day-to-day operating procedures 
differ from the proposed FDCM. 

Producers could take the initiative by organizing a cooperative to 
establish and operate FDCM. The cooperative approach would give 
producers an opportunity to make input into specification of contracts 
and operating procedures. 

The federal government could also institute FDCM. If the bene- 
fits are significant for improving the efficiency, and perhaps the equity, 
of our food and fiber production and marketing system. Congress 
could pass the necessary enabling legislation, and FDCM could be 
instituted by a new government corporation similar to the Commodity 
Credit Corporation (CCC) or by a federal market order. 

Financing would be needed to develop, promote, and operate FDCM. 
Developmental and promotional funds could come from corporate 
stockholders, cooperative members, or the federal treasury, depending 
on the form of organization that would arise to implement FDCM. 
Private organizations could also borrow funds or possibly sell bonds. 
Operating monies could come from fees charged FDCM users, regard- 
less of organization form. 

Regulation. — FDCM would come under the purview of the Com- 
modity Futures Trading Commission, the Securities and Exchange 
Commission, the U.S. Department of Agriculture, and state depart- 
ments of agriculture. Compliance with all applicable regulations 
would be necessary regardless of which organization or group might 
implementFDCM. 

Conclusions 

FDCM represents more than shifting transactions from spot to a 
contract basis. FDCM implies an organized, computerized exchange 
mechanism for trading forward deliverable contracts. The potential 
economic impact of FDCM on efficiency, competition and market 
power, access to markets, and risk varies substantially from commod- 
ity to commodity. Potential operational efficiency increases are greater 
for a forward-contract market trading exclusively in production rather 
than marketing contracts. Exclusive production contracting could be 
most easily adopted for many fruits and vegetables for processing and 
least easily adopted for food and feed grains. 



27 



For commodities now primarily under contract at the producer- 
first handler level, the most significant economic impact on marketing 
would be realized from additional and more accurate market infor- 
mation inevitably generated by FDCM. For commodities now traded 
primarily in spot markets, the most significant economic impact would 
occur from the shift to contracting. While some generalizations can be 
made, the net benefit for producers and consumers from an institution 
such as FDCM depends on the circumstances surrounding the market 
for each commodity. 



MANDATORY PUBLIC REPORTING OF MARKET 
TRANSACTIONS 

(By Kirby Moulton ^ and Daniel I. Padberg') 



Introduction 

The performance of our competitive food system is of vital impor- 
tance to all Americans. Why their concern ? 

Consumers, because prices are higher than necessary and prod- 
uct choices restricted ; 

Farmers, because marketing alternatives are limited and eco- 
nomic returns variable ; 

Businessmen, because profit opportunities are obsecured and 
planning processes frustrated ; and 

Public policy makers, because monitoring is difficult and policy 
need unrecognized. 
These concerns become more clearly recognized as our economic 
system changes. In the past, many sectors of our economy — and par- 
ticularly the agricultural sector — were comprised of numerous inde- 
pendent firms and organizations. Market participants could not in- 
dividually influence total market results. These disaggregated (or 
dispersed) markets were not necessarily efficient or competitive. In- 
stances of local monopolies and discriminatory pricing were — and 
are — all too evident; however wherever a free flow of market infor- 
mation existed, the opportunities for discrimination were reduced. 
Information was the lubricant for efficient market coordination. 

In time our system changed. Technological advances led to larger 
firms, vertical integration occurred, and economic concentration re- 
sulted. Many traditional activities of the marketplace were internal- 
ized by large firms. Individual market participants could now influ- 
ence final market results as "conscious cooperation" became the 
mechanism of economic coordination. Significant amounts of mar- 
Iket information formerly provided through open market transactions 
l>ecame hidden and lost in private contract negotiations and internal 
accounting records. 

This change process has resulted in a mixed system containing a 
spectrum of markets ranging from concentrated to disaggregated. It 
has also resulted in a highly variable market-information system. In 
some markets the quality of publicly reported information is adequate 
for production and marketing decisions, but in others reported trans- 
action information is far too skimpy or unreliable to be useful in main- 



1 Economist, University of California Cooperative Extension, and on the Glannlnl 
Foundation of AfH'lcultural Economics, Berkeley. 

' Professor and Chairman, Department of Agricultural Economics, University of Illinois, 
Urbana. 

(28) 



29 



taining competitive conditions. Consequently, economic and public 
policy decisions are made with less information of variable quality. 

As the availability and quality of information declines, the market- 
ing system works less well. Private trading is more uncertain in relat- 
ing supplies and demands. As risk and uncertainty increase, they add 
to marketing costs. Consumers pay more, and farmers get less as a 
result. In addition, questions of "accountability" arise. Without ade- 
quate information our basic competition is less effective. 

What can be done to improve this system ? That is the focus of this 
paper. Specifically, we examine a proposed mandatory market report- 
ing system and its potential for providing a fuller range of market 
information needed for public and private decision-making. Implicit 
in our approach is the belief that market information prograins are 
part of our national policy toward competition. They provide infor- 
mation needed by farmers, processors, distributors, and consumers to 
facilitate competitive performance ; and they provide essential infor- 
mation if society is to continually appraise and correct our market 
econom5^ Without information, the market alternatives facing farm- 
ers, as well as all others in our competitive system, are dim and 
uncertain. 

A Mandatory Market Reporting System 

The maintenance of a competitive private market economy is a key 
objective of our national economic policy. Assuring the availability of 
information needed for such a market is the function of a market 
reporting system. If a voluntary reporting system is unable to generate 
needed information, then a mandatory system may be necessary. 

The test for determining what information ought to be provided 
is a difficult one. Some concept of net public benefit is needed — a con- 
cept compatible with a private market economy. The mandatory re- 
porting system we describe is considered in the context of this 
constraint. 

The reporting system discussed here is an extension of the present 
Federal-State Market News Service. It is mandatory because the 
present voluntary system does not produce adequate information for 
competitive market behavior. Some important markets are not re- 
ported at all, and others are reported incompletely, and possibly 
inaccurately. 

In determining the design of a market information system, more 
detail is needed concerning decision-making requirements. It will do 
American farmers little good if the information provided is suitable 
only for economic researchers. We are concerned with two important 
classes of decisions : 

Those related to product marketing, such as when and where to 
sell and buy ; and 

Those related to planning and investment activities, such as 
crop enterprise planning and facility acquisition. 
Deficiencies in the present system. — Our current government- 
operated information system for agricultural markets had its begin- 
ning over fifty years ago. Its objective was and is to provide market 
information needed for better operation of agricultural markets. From 
a modest start, the Federal-State Market News Service expanded to 
cover important markets for our principal commodities. Reports of 



30 



prices, volumes, and jreneral market conditions are based on observed 
transactions in auction markets and voluntary reports in other mar- 
kets. Information is gathered by reporters, usually using telephone 
contacts. 

The market information provided has resulted in better decisions in 
many markets but still falls short of what is needed- Numerous trans- 
actions are not reported. ^lany small markets are not covered even 
though they are important to local producers. For example, flower 
growers in California, with multimillion dollar annual shipments, 
lack information at the first-handler level. Potato growers lack infor- 
mation about the processed potato market which heavily influences the 
demand for raw potatoes. 

In some cases market information is lacking because major buyers 
refuse to report transactions as in the Midwest where some major 
meat packers with highly decentralized cattle-buying operations will 
not report prices and volumes. As a result, producers must sell in 
relative ignorance of what "true" market is. In another case a major 
packer of bacon in Wisconsin will not cooperate in providing market 
data to market reporters. The finger of fault should not be directed 
only toward processors and middlemen : some farmers also fail to co- 
operate in providing information for crop surveys and market reports. 
These information gaps provide serious impediments to efficient 
marketing. 

Because the present system is voluntary, cooperators can be more 
selective about the information provided. Those reporting transactions 
may report prices favorable to themselves, or fail to report quantities, 
or aggregate over several grade standards to obscure price spreads. 
The net result is inadequate information for buying and selling 
decisions. 

Structural changes have decreased the flow of market information. 
While public markets yielded information which could be reported, 
newly evolved private markets, using contracts and individual negotia- 
tion, create no public signals. An example is the transition of fresh 
produce distribution from organized wholesale markets to a system 
of field buying by major food distributors. The wholesale market 
created information which was carefully measured in terms of price 
and quantity and in some cases quality, creating an important stream 
of market information. The field buying operations involve most of 
the same physical functions and handling processes, but the public 
information is not generated. Without mandatory reporting programs, 
market news agencies find it very difficult to identify the terms of 
trade, quantities, or qualities moving in this "closed" market system. 

Contracts are an important integrating device in our new market 
systems. Many markets utilize both cash and contract transactions. 
Cash transactions may be reported, but contract transactions generally 
are not. More and more, seasonal and multiseasonal "supply" contracts 
are being used in agricultural markets. Supply contracts, by definition, 
do not fix price but generally specify the means for its determination. 
In some cases the settlement price may be tied to an outsider price as in 
sugar beets where prices are based on average refined sugar prices. In 
other cases the contract price is tied to the average market price re- 
ported in the market at time of delivery. 

The dilemma in this situation is evident. Farmers may deliver a 
crop with no assurance of price determination until a later date. Even 



31 



if a market price is known it may be the result of a few transactions in 
the cash market rather than many transactions in the contract market. 

In the case where farmers contract individually with processors or 
other buyers, they may do so with no knowledge of what terms are 
being offered to other farmers in the same or neighboring markets. 
Without this knowledge — information of this nature is not generally 
reported — the farmer is at an economic disadvantage to the buyer. 

Additional problems develop when contract prices are tied to cash 
market prices. If the source of market information is primarily proces- 
sors, growers fear the ability of processors to manipulate reported 
cash prices by selectively reporting transactions. In other instances, 
processors are worried al30ut the ability of competitors to manipulate 
raw product prices upward by purchasing small quantities at high 
prices in order to establish a reported price. 

In some cases transactions are relatively straightforward and re- 
porting not difficult ; but closed transactions can be much more com- 
plex as buyers and sellers often agree to payment systems which 
essentially share the risks between them. These arrangements may 
have the buyer making a partial payment at the time of product de- 
livery and, depending on eventual pack-out and sales price, an addi- 
tional payment later. In these much more complex closed transactions, 
mandatory reporting may be very difficult and yield less useful 
information. 

These problems can be reduced in a mandatory reporting system by 
requiring that processors report volume represented by price quoted, 
by obtaining more information from producers in addition to proces- 
sors, and by confirming prices through a second source. 

Decisions relating to investment and public policy require the most 
comprehensive sets of information. Investment decisions require in- 
formation permitting estimation of the profitability of alternative in- 
vestments. Public policy decisions require information about profits 
earned through various economic activities in order to gauge system 
efficiency relative to accepted norms. 

Business line reporting and transfer price reporting could provide 
much information needed for investment decisions. With such infor- 
mation farmers, for example, could make a more intelligent decision 
about investing in processing plants or shipping facilities. In similar 
fashion, other firms outside the industry could evaluate the oppor- 
tunity of entering the industry. In both cases, barriers to entry result- 
ing from informational gaps would be reduced. 

Business line reporting may emerge as the result of other competi- 
tion policy decisions, but is unlikely to be initiated solely for the pur- 
poses discussed in this paper. Such information gaps will continue to 
obscure the existence of market opportunities and reduce our ability to 
evaluate market performance. 

Information concerning product end use is also needed to facilitate 
investment and marketing decisions. For example, farmers consider- 
ing investment in hop production should know about the sale of beers 
using hops relative to the sale of beers not usin^ hops. A f armer should 
know if observed beer shipment increases imply a correspondingly ex- 
panded market requirement for hops. In a similar vein, information on 
the movement of granola cereals utilizing almonds is of special interest 
to potential almond growers. 



32 



A mandatory reportintr s^^stem could improve the availabilit}^ of 
end use infoiTnation. For example, information concerning the volume 
of tomatoes processed into paste, whole products, and juice facilitates 
estimation of the marginal value of raw tomatoes, hence an equitable 
farm price. The proposed system could improve the classification of 
product movement to include relevant price linos and product specifica- 
tions which influence raw product I'equirements. 

Hierarchy of information needs. — A great deal of additional infor- 
mation is needed to remedy the deficiencies of our present market- 
reporting system. AVe see a hierarchy of information needs which must 
be satisfied if our information flow is to approach that of an open 
market economy. Xeeded are : 

1. Adequate reports covering price, volume, and relevant prod- 
uct specifications in cash and contract agricultural market trans- 
actions ; 

2. Reports of market transactions at the next higher and next 
lower level in the distribution chain ; 

3. Detailed end use data suitable for evaluating raw product 
use trends ; 

4. Reports of relevant transfer prices and transactions in verti- 
cally integrated market organizations; and 

5. Line of business reporting by conglomerate firms. 

This hierarchy of information needs represents a series of objectives 
which our information programs should be directed toward if they 
are to be an effective part of our competition policy. A mandatorv^ re- 
porting system is not likely to achieve all these objectives without 
other policy changes; however as lower level information needs are 
satisfied, the requirements for transfer price and line of business re- 
porting should be carefully assessed. 

Voluntary versus mandatory reporting. — ^Large amounts of infor- 
mation are required in the system we have described. A^^iether or not 
our existing report procedures are appropriate for the additional in- 
formation volume is open to question. Particularly at issue is the volun- 
tary character of our current system. 

Voluntary reporting forms the basis for our current agricultural 
market reports and for most other public reports of economic trans- 
actions. The motivation for cooperation varies. ^lany of those who pro- 
vide information assume the costs of doing so are at least offset by 
the value of aggregate market information returned to them. Pre- 
sumably, others provide information in belief that voluntary coopera- 
tion is less onerous and will forestall a mandatorv- reporting svstem. 
For example, the state of Wisconsin requests processors to submit con- 
tracts to the state for review and summary purposes. Compliance with 
this request is not required by statute, however the state has authority 
to obtain contracts and related material in cases of contract dispute. 
Tndustrv members apparently believe that acceding to the request is 
preferable to the potential demand for contracts in the event of dis- 
putes. Compliance is close to one hundred percent. 

Reporting of contracts and internal prices presents some problems 
which may not be overcome by a voluntar\' reportinpr system. One 
problem is the natural reluctance of firms to divulge internal infor- 
mation. A'Miile the Wisconsin experience suggests contract informa- 
tion can l)e obtained throuiih a semi -voluntary system, we are skeptical 
that transfer prices or line of business data can be obtained in that 



33 



maimer. The second problem arises from difficulties in sampling the 
complex transaction in private markets. Because such transactions 
are characterized by a wide variety of product specihcations. delivery 
terms, and payment schedules, careful sampling is needed to produce 
reliable market reports. Voluntary reporting is not likely to produce 
the sample dimensions iieeded for reliable estimation of market 
activity. 

Two approaches are apparent for obtaining market information. 
One is to require that all specified transactions be reported ; the second 
is to require that information be supplied whenever requested. A man- 
datory reporting of all transactions would be extremely burdensome. 
The reporting system would have difficulty in collecting data, inter- 
preting it, and communicating the resulting information. Enforcing 
compliance would necessitate a large staff. We believe the expense of 
this approach would exceed its benefits by a considerable margin. The 
second approach makes more sense. Kef usal to give full transaction in- 
formation when requested would be considered an unfair trade prac- 
tice, thus the basis for enforcement already exists imder current trade 
practice policies. Unnecessary reporting would be reduced, and the 
inflow of data maintained within organizational capabilities. This 
approach would require determination of valid sampling programs 
to assure credible market reports. 

How AXD Where !Maxdatory Eeportixg Is Applied 

We have little experience to draw on in evaluating a mandatory re- 
porting system. If such systems are operating in foreign markets, we 
are unaware of them. 

Some efforts in the direction of mandatory reporting have been 
made within the United States. We have described previously the con- 
tract reporting program established in Wisconsin. The summarized 
contract data is published periodically, but too late to influence plant- 
ing or current year contracting decisions. The reports do provide a 
base line comparison for use in subsequent contracting decisions. 

North Carolina statutes require processor contracts to contain 
clauses stipulating delivery conditions, methods of payment, dispute 
procedures, and other terms considered basic to good contracting pro- 
cedures. Compliance is obtained by requiring fruit and vegetable 
processors to submit contracts to the state for approval prior to mak- 
ing offers to growers: however the state does not collect data on prices 
at which the contracts are ultimately negotiated. 

Xew York requires vintners to announce a price for their supply 
contracts on or before September 15. The objective of this require- 
ment is to prevent price determination after grapes have been deliv- 
ered for crush. In practice, however, the major purchaser continues 
to announce prices about the end of July. The impact of the law falls 
onlv on wineries who lag behind the leader in announcing prices. 

Within California, the Federal-State Market Xews Service collects 
and disseminates contract information which some processors provide 
to them. Coveraofe is limited and reported irregularly for wine grapes 
and other fruit as available. 

These state efforts are tentative steps to contract-price reportinsf. but 
do not provide information as to how a price reporting system should 



34 



work. Several useful pieces of information emerge, however. In North 
Carolina contract terms apparently have tended to standardize, mak- 
ing price comparisons more informative. If this tendency should 
occur as contract reporting is expanded, then a source of considerable 
complexity for such reporting would be removed. By analogy, one 
could argue that transfer and other internal price reporting require- 
ments would tend to standardize appropriate accounting procedures. 
The Wisconsin experience demonstrates that mandatory reporting 
requirements may not be necessary to obtain cooperation. The Cali- 
fornia experience suggests the willingness of some market partici- 
pants to voluntarily provide contract information in the absence of 
any statutory requirement.^ 

Conditions for Implementation 

An improved market reporting system cannot be achieved unless 
several conditions are met. Among these conditions are a recognition 
of the need for information; resolution of legal questions regarding 
mandatory reporting ; a willingness to enforce the rules ; and the equi- 
table application of policy to agricultural and nonagricultural sectors. 

Mandatory reporting as a concept must be subject to some notion of 
cost-benefit analysis. Costs are easier to measure than benefits. They 
are measured in dollars and relate to the additional friction put on 
the system by a supervised, regulated system of transaction reporting. 
Benefits are more illusive because they are spread among market and 
nonmarket users. 

The reporting system must account for varying information require- 
ments if it is to be supported. For farmers, information needs vary 
according to market institutions and procedures. Farmers selling on 
volatile cash markets have a vital need for timely and comprehensive 
market reports. Those selling on contract markets at bargained prices 
may have little need for frequent price and movement information. 
Farmers need to know the negotiated price in order to compare esti- 
mated returns against alternative crop enterprises. They would like 
to know prices in other areas in order to evaluate the effectiveness of 
their bargaining association. 

The legal implications of a mandatory reporting system remain to 
be tested. The privacy of contracts and internal accounting informa- 
tion has long been respected in the United States, and generally 
abridged only through subpoena power or confidential tax reporting 
requirements. 

A willingness to enforce the rules is an essential condition for an 
effective reporting system. Voluntary compliance has been an impor- 
tant factor in the success of our national tax system. This compliance is 
partly the result of the visible willingness of the Internal Revenue 
Service and Justice Department to enforce tax rules. The flouting of 
Congressional intent about distributing the benefits of federal irriga- 
tion systems results from failure to enforce acreage limitations within 
certain irrigation districts. For a mandatory reporting system to work, 
the rules must be equitable and they must be enforced. 

If and when the system encompasses mandatory reporting of trans- 
fer prices and business line results, then it must apply to nonagricul- 



'The existence of a viable Forward Deliverable Contract Market as described In the 
paper by that title in this series would be a source of information on contract value. 



35 



tural sectors as well. To do otherwise would result in a discretionary 
economic policy. Compliance under such a condition would be difficult, 
if not impossible to obtain. 

Clearly, establishing a mandatory market information system would 
not be an easy task. Further study of the legal implications and the 
appropriate sampling procedures are needed. The comprehensive sys- 
tem we have described might be implemented by first trying to report 
contracts, as done in Wisconsin, then expanding it to report contract 
prices when negotiated. Subsequently, reports of next level domestic 
and export movement could be initiated. Finally, appropriate legisla- 
tion could be undertaken to permit reporting of transfer prices in 
vertical and conglomerate firms using a system tested by contract 
reporting. 

Results Expected 

The expected effect of mandatory reporting of market transactions 
is to make a structurally mixed system work more like a system con- 
taining many small firms which are coordinated by a market. Even 
though there would be large, integrated, and conglomerate firms in 
the system, they would provide the same kinds of information made 
public through transactions among small firms in open markets. This 
information would influence the actions of farmers, buyers, investors, 
and regulatory agencies, and increase consumer confidence. 

More complete and reliable public information about prices, quan- 
tities, and qualities would improve market access for farmers. If one 
market location, product use, or marketing channel gave higher prices 
than another, this public information would give farmers a better 
basis for marketing decisions. Their production and selling adjust- 
ments would result in more profitable resource use and a more effi- 
cient system. 

Market uncertainty would be reduced by better public market infor- 
mation. Since today's commercial farmers have large expenses for 
inputs they must buy, money borrowed at high interest rates is a major 
element in farm management. Financing these productive but expen- 
sive inputs will be greatly facilitated if market price uncertainty can 
be reproduced. 

Prices resulting from more informed actions of buyers and sellers 
would likely be more equitable or fair. This is true where prices are 
determined by market forces (livestock) and where bargaining is in- 
volved (cannery crops). 

Farmers would have a better basis for evaluating the benefits of 
integration or other initiatives if reliable public information on prices 
and costs were available. Many times farmer initiatives have been 
taken with only sketchy information concerning prices and costs. 

Operation of a mandatory reporting system for major agricultural 
crops would have costs. The costs of operating the system would even- 
tually have to be borne by the public taxpayer or shared by producers 
and consumers. Undoubtedly the mandatory system would cost more 
than the present voluntary system, but the results would provide more 
complete and accurate information. 

Consequences 

Mandatory collection and dissemination of appropriate information 
could enable farmers to make better production and marketing deci- 



36 



sions and improve competition. It is frequently argued that the basic 
policy for farm production and marketing is an outgrowth of very 
specialized political activities. In past times of less general communi- 
cation flows and more isolated rural people, the "farm bloc" was a 
functional special interest group. As the nature of rural and urban 
constituencies change — with much greater participation in higher edu- 
cation and more communication in general — the very agrarian focus 
of farm policy is being lost. New participants in the policy formula- 
tion process include labor unions, consumer groups, and other sectors 
more broadly representative of society as a whole. 

As consumers become a more active and vocal part of the emerging 
"food policy," the question of consumer confidence becomes an issue or 
significance. Public accountability of the food marketing sector is in- 
evitably going to receive more careful scrutiny in the future than it has 
in the past. To the extent that these issues and political realities rise 
in significance, priorities must change. An approach to complex orga- 
nizations in agribusiness requiring the disclosure of basic factual in- 
formation as a cost of doing business, to be weighed against efficiency 
advantages of these large organizations, may become more tenable. 

Even if agribusiness firms recognize the need for accountability and 
public responsibility, it is difficult for them to achieve it alone. Infor- 
mation flowing from a mandated disclosure policy is much more credi- 
ble to the public than voluntary disclosure of the same facts. There are 
appealing arguments for a partnership between public and private 
initiatives in developing an information system. A mandated market 
information program would allow standardization which is essential 
if the reported facts are to be useful in analysis. 

Another consequence of mandatory reporting of market facts would 
be its effect on our national competition policy. In many cases, contro- 
versial trade practices persist in situations where public information 
about prices and quantities is unavailable. When market information is 
made public, these practices come out in the open, and both regulatory 
agencies and market participants have a better view of what is going 
on. lYhere basic market information is publicly available, actions of 
responsible executives, board of directors, and regulatory agencies 
usually result in the reduction of unfair trade practices. 

What Would Be Necessary To Get Mandatory Eeporting? 

Mandatory reporting would require new laws. Are the benefits 
worth the work to get the laws changed? What is the case for this pro- 
posal ? As a society, we tolerate a wide range of private initiative in 
developing different organizational arrangements within the industry 
structure. Why? Because we have a basic belief in the usefulness of 
private initiative in the evolution of economic efficiency. Yet for private 
initiative to be effective, individual investors need information. If 
access to private opportunity is to be broadly spread, this information 
must be public. So the complex organizational form represents a 
dilemma: it is usually technically efficient, but it usually erodes the 
quality and quantity of public information. 

The challenge is to weigh the efficiency advantages to society against 
the cost of providing to the public the information lost in the trade. A 
most direct way to do this would be to legally require complex firms to 



37 



absorb the cost of providing basic information to the public. If the 
cost of providing the "lost" information outweighed any technical 
benefits, then firms wouldn't integrate, and society would be left with 
a simpler industry structure. On the other hand, if the benefits within 
the integrated structure outweighed the cost of providing basic in- 
formation to the public, then we would have a real benefit to society 
from the complex organization. It does not seem appropriate for the 
public to subsidize large private organizations by doing without the 
basic facts needed by farmers, buyers, consumers, investors, and public 
analysis. 

Conclusions 

The need for publicly reported market information has long been 
recognized. Also, we understand how complex firms and marketing or- 
ganizations reduce the quantity and quality of marketing information 
available to the public. Yet we have relatively little experience in de- 
signing and implementing a system requiring basic information to be 
made public. A further — and perhaps more damaging — problem is 
that we have not carefully developed a rationale for requiring private 
firms to provide information to the public. 

We conclude that it may be within the public interest to require pri- 
vate firms to bear the cost of supplying the information which their 
complex structure removes from the public sector. Further experi- 
mentation is required in the design and operation of a data system com- 
bining the initiative of public and private organizations. This experi- 
mentation and its cost may be justifiable as a part of our national 
competition policy. 



EXCLUSIVE AGENCY BARGAINING 

(By James D. Shaffer^ and Randall E. Torgenson*) 



Introduction 

In recent decades the structure of the food and fiber sector of the 
economy has changed from a decentralized, atomistic system to a ver- 
tically coordinated marketing system dominated by large-scale food 
chains and processors who demand assurance of adequate supplies on a 
regular basis. To assure supplies, these volume buyers arrange for 
partial- or full-supply contracts with producer associations or engage 
in contracting with individual farm operators. Such dealings are noted 
for the disparity in size and market power between the large-scale pur- 
chasers and the individual contract producers. 

Besides the problem of disparity in marketing power, contract pro- 
visions are becoming increasingly complex. Contracts are known to 
differ among producers from the same region, depending on which firm 
they are contracting with. Contracts with different provisions are also 
offered by the same acquiring firm. It is generally recognized that 
handlers are not so concerned with the level of prices as with the fact 
that they are not paying more for similar products than are their 
competitors. 

Invariably, contracting also encounters problems of enforcement. 
Complex contract provisions may not be carried out to the letter by the 
parties involved. A need has been felt by producers for a code of unfair 
trade practices to handle disputes over condemnations, weighing prac- 
tices, contract cutbacks or cutoffs, and prompt payment for deliveries. 

The natural outgrowth of each of the foregoing situations — the im- 
balance of marketing power between large-scale purchasers and in- 
dividual contract producers, the need for standardized contract terms, 
and the need for a means to settle contract disputes — serves to identify 
the background for consideration of an exclusive agency bargaining 
arrangement in agriculture. 

A Definition of Exclusive Agency Bargaining 

The basic concept of exclusive agency bargaining includes as a mini- 
mum a bargaining unit consisting of a group of farmers producing a 
common product ; a bargaining association which has the authority to 
represent in trade all farmers in a bargaining unit, whether members 
of the association or not; and a set of rules establishing rights and 
obligations of members, non-members and handlers. 

Exclusive agency bargaining differs from voluntary collective bar- 
gaining by the fact that the exclusive agency bargains for price and 



1 Professor of agricultural economics, Michigan State University. 

2 Stafie Economist, Agricultural Marketing Service, U.S. Department of Agriculture, 
Washington, D.C. 

(38) 



39 



other terms of trade which apply to all who are defined within an as- 
sociation, members and non-members alike. Collective bargaining with 
the exclusive agency grants more power and responsibility to the bar- 
gaining association than is usually possible under voluntary bargain- 
ing. It is similar to the rights of a union with an agency shop operating 
under the National Labor Relations Act where a worker does not have 
to join the union but must work under union-established conditions and 
must pay for union services. 

Why Exclusive Agency Bargainixg Is a Useful Tool 

At its most basic level, vertical coordination involves the synchroni- 
zation of supply and demand. Future demand and supply are uncer- 
tain, and coordination under uncertainty results in unsatisfactory sys- 
tem performance. By organizing farmers to contract for the future 
delivery of commodities to meet future demands, coordination of the 
food system can be significantly improved. 

In order to carry out this coordination, the uncertainty of future 
supplies — the production decisions of other farmers and the weather — 
must be dealt with directly. ^\Tiereas individual contracting does little 
to deal with these basic uncertainties, exclusive agency bargaining 
deals explicitly with them. Under individual handler and farmer con- 
tracting large quantities of a product are outside of the contract sys- 
tem, and contracts are difficult to enforce. In such situations, handlers 
uncertain about future quantities and prices. However, an exclusive 
agency bargaining arrangement would allow the guaranteed perform- 
ance on the supply side of the contracts, within the contingencies im- 
posed by the environment. There would also be enforcement and polic- 
ing of contract terms on the buying side that would contribute to the 
establishment of an effective contracting system. Vagaries of weather 
would be dealt with through terms-of-trade schedules. 

In addition to these special features, exclusive agency bargaining 
with future production contracts offers producers better information 
on which to base production and marketing decisions, and shifts de- 
cisions about future demand forward in the marketing channel. The 
agency can allocate supplies in cases of market surplus and can ne- 
gotiate to harvest and deliver only those quantities that will result 
in a return above variable costs. Demands for new products tailored 
to specifications can also be more easily accommodated through com- 
munication and price signals by the agency. Clearly, coordination 
and resource allocation are improved by use of exclusive agency bar- 
gaining through establishment of more'' reliable future prices around 
which farm operators and other market channel participants — each 
of whom have sizable investments — can avoid the uncertainty associ- 
ated with otherwise gyrating prices. 

Examples of Exclusi\'e Agexcy Bargaixixg 

Exclusive agency bargaining examples can be found where an or- 
ganization, federation, agency-in-common or some combination of or- 
ganizations is designated as exclusive bargaining agent for all farmers 
m a defined group. This arrangement may exist in a variety of struc- 
tural forms under specific legal sanction, and/or under formal or in- 



67-134—76 1 



40 



formal agreements between producer organizations. Instances are re- 
latively few, and may be viewed as part of the cutting edge of new 
pricing arrangements sought by farm operators. 

An example is the 1973 Michigan Agricultural Marketing and Bar- 
gaining Act which provides for exclusive agency bargaining for per- 
ishable fruits and vegetables through sanctions of a state board. Under 
the act a cooperative certified by the board is given legal rights to act 
as an exclusive bargaining and sales agent for all farmers, members 
and non-members alike, in a defined bargaining unit. Several other 
states have enabling acts supporting limited bargaining by farmers. 

Another version of this concept is found in milk markets where co- 
operatives band together through a common marketing agency that 
negotiates over-order premiums with handlers for all member organ- 
izations selling milk on that local or regional market. A less formal 
arrangement can be identified in the division of labor between farm 
groups in California where the fruit and vegetable bargaining associa- 
tions — to which operating cooperative members also belong — establish 
effective field prices for raw products moving to processors through 
negotiations with proprietary handlers. Finally, situations can be 
identified in European countries where general farm organizations, 
through formal agreement, have been given exclusive bargaining 
rights to represent all of agriculture in establishing wholesale prices 
through periodic negotiations with government authorities. 

It is obvious from the examples cited that exclusive agency bar- 
gaining differs from traditional group action by farmers by virtue 
of a higher and more sophisticated level of organization, more ex- 
plicitly defined rules that sanction and govern the activity, and by 
virtue of the focus on pricing activity at the farm gate or field level. 

The Michigan Act represents the most formal structure for ex- 
clusive agency bargaining. Less formal arrangements involve the 
voluntary meeting of the bargaining agent with product buyers or 
government authorities on a regular basis to determine contract terms 
for goods and services furnished to them. Often the benefits of such 
]Dricing accrue to the non- joiners in the market as well as to the asso- 
ciation members. "^Yhile certain equity problems may exist in such 
informal negotiating arrangements, the association or exclusive bar- 
gaining agency nevertheless in effect represents all producers in the 
market through its actions. 

Areas or Potential Use and Alternative Institutional 
Arrangements 

The appropriate institutional framework for exclusive agency bar- 
gaining is dictated by the organizational discipline, custom, legal en- 
vironment and nature of the contracting involved. In situations where 
contracting is the major method of marketing crops and no acceptable 
pricing arrangement exists, exclusive agency bargaining has the unique 
capacity to establish a climate for price discovery as well as the en- 
forcement of those prices through the bargaining unit. 

Highly perishable commodities produced in localized regions — fresh 
and processed fruits and vegetables for example — lend themselves most 
easily to use ; however, the concept is not limited by these conditions or 
to these crops. As more livestock for slaughter is contracted or is mar- 



41 



keted direct to packers, a situation is established that lends itself to 
exclusive agency bargaining. Similarly, contract broiler production in 
which a marketable product is not involved easily lends itself to nego- 
tiations over growout fees and other terms of contract. 

In some areas of the western United States custom dictates that a 
farm operator maintain a dual membership in a bargaining associa- 
tion and a marketing cooperative a bargaining association to negotiate 
field prices with processors, and a marketing cooperative for all or part 
of his marketings. Since the marketing cooperative is an integrated 
entity, no field price is determined. The farmer in this instance re- 
ceives the residual price after operation and finance commitments are 
deducted from the selling price. Through dual membership, the bar- 
gaining association in effect plays a role as the exclusive bargaining 
agency by negotiating field prices for the whole industry. Prices nego- 
tiated by it alongside state or federal marketing orders become the 
prevailing field prices for these commodities. 

In several European countries, the structural and functional dual 
membership role in pricing is more formalized.^ The general farm or- 
ganizations — as professional associations — have for over twenty-five 
years assumed, through formal agreement, a role as the farmers' nego- 
tiating agent vis-a-vis the government in establishing farm prices for 
the coming year. Products are extensively marketed through coopera- 
tives oro-anized along commodity lines and structured through regional 
and national levels, but it is the professional associations with support 
of the cooperatives, that are exclusive bargaining agents for all farm 
operators in the country. Prices in this institutional framework are 
negotiated by a farm delegation and a delegation of government offi- 
cials on an annual or biannual basis. If prices paid by farm operators 
escalate or if industrial wage earners' pay advances to a point where 
farm operators are placed in a less equitable position, negotiation be- 
tween the delegations reconvene. Farm prices vary throughout the 
year according to seasonal supply and demand patterns around the 
negotiated price. 

In the case of milk marketing, cooperatives in this country have 
banded together through a common agency for in-common marketing. 
These marketing agencies are the exclusive pricing and sales agents for 
fluid milk sold to handlers in regions or major metropolitan areas on 
behalf of cooperative members located within an area defined by fed- 
eral milk marketing orders. In some instances the agency-in-common 
has negotiated premiums commonly called "over-order premiums," 
above the "minimum" federal order milk prices. In this institutional 
arrangement pricing occurs in association with an existing maketing 
mechanism, the federal marketing order which prices products uni- 
formly to all handlers. 

Advantages axd Disadvantages of Exclush'e Agexcy Bargaining 

It is difficult to list the advantages and disadvantages of exclusive 
agency bargaining because of the many different ways it might be or- 
ganized and regulated. The design of the enabling legislation and the 
actions taken by farmers and their associations will determine the 



' For a more lengthy description, see Randall E. Torgerson, "Farm Bargaining," Oslo : 
Landbruketsforlag, 1971. 



42 



benefits and costs. Also, an assessment of advantages and disadvant- 
ages must be carried out in the context of who benefits and who pays 
the cost, as well as in comparison to some relevant alternative. Limits 
of space preclude an extensive comparison. Thus, the comparison is 
widi the current mixed-marketing system. In the following analysis 
we will assume national commodity-wide bargaining for pre-produc- 
tion contracts. 

Possible henefits or advantages to farmers 

1. An assured market at acceptable terms of trade before current 
production decisions were made. 

2. All farmers would be assured equal access to marketing informa- 
tion, a major benefit of the proposal. 

3. Farmers would have input in determining acceptable terms of 
trade and quantities to be marketed. Because all terms of trade could 
be negotiated, farmers would be able to avoid some of the extreme un- 
certainties of the market, avoid large losses due to unanticipated 
market prices and, in general, be able to plan on the basis of certainty. 

4. Exclusive agency bargaining is a self-help program and would 
involve relatively little cost to the federal treasury. Unlike federal 
price support programs, farmers would receive benefits through the 
market. They would participate in the economy more on a par with 
large corporations, organized labor, and professional groups. 

5. The exclusive agency would represent all producers of a given 
commodity and reduce the proliferation of competing organizations 
and the associated costs. 

6. Non- joiners would be required to share the costs of collective bar- 
gaining and thus eliminate the costs and problems of the free rider 
who benefits from other farmers' investments in building and main- 
taining a bargaining association. 

Possible costs or disadvantage to farmers 

1. As compared with an open market the individual farmer has less 
choice by having to accept terms negotiated by his association. Non- 
members may feel they, especially, have lost independence of action. 

2. Substantive costs are involved in organizing and operating bar- 
gaining associations : members must be recruited ; presentations must 
be made before hearings; records must be kept; information must be 
supplied to unit members ; data must be collected and analyzed ; col- 
lective decisions must be made ; and long hours of negotiations must be 
supported. 

3. There are inevitable conflicts of interest among bargaining unit 
members. Settling these conflicts can cause ill will and impose costs on 
those whose preferences or interests are less well-served by the 
association. 

4. A bargaining association can make mistakes. When a mistake is 
made, large numbers of members suffer, in contrast to an individual 
farmer suffering from his own mistakes. The association will have the 
characteristics of a bureaucracy and will not be completely respon- 
sive to its members' needs and preferences. 

5. The organizational procedures are sophisticated; there is a lack 
of experience; standard operating procedures have not been estab- 
lished and are shrouded in legal technicalities. The legislation and 
specific actions would be tested in court. Uncertainty and costs would 
increase during the period of court testing. 



43 



6. For some commodities exclusive agency bargaining would be a sub- 
stitute for vertical integration into the marketing channel by farmer 
marketing cooperatives. Farmers would have to look at the trade- 
offs between bargaining and vertical integration. 

7. The actions of some farmers or farm groups to use an exclusive 
agent law would likely be viewed by others as a direct effort to take 
away their rights. 

Possible heneflts or advantages for buyers 

1. Processors and retailers could improve the reliability of supplies 
of highly specified products, thereby reducing uncertainty and increas- 
ing their efficiency. They could also better plan production and 
promotion. 

2. A mechanism would be established for government enforcement 
and association policing of contracts. 

3. The association would assist in assembly, in identifying available 
supplies, and in negotiation of contracts — services that now must be 
purchased by buyers. 

4. The process of negotiation would generate much better informa- 
tion about future supplies and commodity-wide demand and thus re- 
duce the risks of mistakes by processors and retailers. 

Possible costs or disadvantages to consumers 

1. In dealing with an organized group, buyers might be forced to 
pay higher prices and lose some independence of action. They could no 
longer profit from having information superior to that of individual 
farmers. 

2. Buyers, too, would have costs associated with negotiating and 
legal actions. 

Possible benefits and advantages for consumers 

1. Consumers could expect to get a more uniform and reliable 
supply of a commodity with less variation in price and quality 
characteristics. 

2. Improved coordination could result in reduced costs between the 
farm gate and the consumer and thus lower prices. 

3. Lower prices could also occur to consumers by reducing risk and 
uncertainty to farmers. 

Possible costs or disadvantages to consumers 

1. Consumers might pay higher prices on the average if farmer asso- 
ciations were able to bargain for higher prices which exceed cost 
savings. 

2. Consumers may suffer from disruptions in the flow of bargained 
commodities during the "learning period" for bargaining associations. 
If farmers expect too much, or if handlers attempt to "buck" bargain- 
ing associations there may be temporary costs to consumers. There is 
likely to be a period of time during which both farmers and handlers 
must adapt and learn to relate to one another in a new framework. 

Possible benefits and adantages for the government 

1. Congress could take the position that it provided a mechanism for 
farmers to help themselves and thus could avoid the conflict between 
consumers and farm groups involved in establishing farm price and 
income policies. 



44 



2. The drain on the treasury for support programs could be reduced. 

3. The bureaucracy established for farm programs could be reduced 
along with the costs of storage programs and associated risks. 

Possible costs or disadvantages to the government 

1. The cost of the board and associated legal costs involved in estab- 
lishing the new system would be the responsibility of government as 
would the ongoing administrative costs associated with maintenance of 
the L^oard and its research needs. 

2. Political conflict would arise over the appropriateness of the leg- 
islation and the conduct of the board and associations. 

The Design of Enabling Legislation 

A national Agricultural Bargaining Board (the board) could be 
established within the Department of Agriculture and would be re- 
sponsible for implementing the law and supervising activities under 
the law. This is one possible way to establish an exclusive agency bar- 
gaining arrangement. 

An important function of the board would be the definition of ap- 
propriate bargaining units. A bargaining unit, petitioned by a group 
of farmers, could be defined in a variety of ways ranging from all of a 
specific commodity sold to a single buyer to all of a commodity sold in 
the United States. The definition could also be for all of a specific 
product sold in a geographic area, or the unit could be defined in terms 
of variety of the commodity, the use of the commodity (all potatoes 
sold for processing or for making potato chips, for example) or be 
limited to a particular season of the year (all late onions, for exam- 
ple). The board would be instructed to define the largest bargaining 
unit consistent with the desires of the producers and the workability 
of the bargaining unit i.e., the potential conflicts of interests among 
groups of farmers within the unit, the potential for identifying and 
separating the commodity, and the feasibility of getting the necessary 
information identifying producers and buyers. 

No bargaining unit could include more than one commodity. This 
would limit the market power of a bargaining association. 

The definition of a bargaining unit would also determine the inclu- 
sion or exclusion of commodities produced by handlers and sales to 
cooperatives. Since cooperative members would benefit from establish- 
ing prices and other terms of trade for the commodity, it is not illogical 
to include them within the bargaining unit even though they would 
theoretically be bargaining with themselves. 

A mechanism would be established to modify the definition of the 
bargaining unit based upon changes in conditions and farmer 
preferences. 

A procedure would be established for accrediting an association of 
farmers to be the exclusive bargaining representative of all farmers 
within the defined barofaining unit. The procedure suggested is that 
an association would have to provide valid evidence of signed con- 
tracts from more than 50 percent of the farmers who were in the bar- 
gaining unit the previous year and who produced more than half the 
commodity within the bargaining unit the previous year. The con- 
tracts would clearly state that the farmer was naming the associa- 
tion as his exclusive bargaining representative and that he understood 
that it would place him under the rules of the bargaining legislation. 



45 



Eules established to regulate the accredited associations would in- 
clude: (1) no farmer could be excluded from joining the association 
(2) all members would have equal rights to vote and iiave equal access 
to the benefit of the associations (3) democratic by-laws would have to 
be established (4) the association could not discriminate among mem- 
bers within the bargaining unit (for example, it could not negotiate 
terms of trade for members of the association which differ from those 
of non-members), and (5) all bargaining authority would be vested 
in a bargaining committee which would consist of only members of the 
bargaining unit and be elected by members of the association. 

Accredited associations would be entitled to negotiate price and all 
terms of trade. They would not be allowed to limit entry into the bar- 
gaining unit but would be allowed to establish marketing quotas in 
order to tailor supplies marketed to the demand at the negotiated 
terms of trade. 

The board would establish dates by which time negotiations would 
have to be completed. These dates would be flexible according to the 
situation of each commodity and could be adjusted to the changing 
annual situation. If negotiations were not settled by a specified date, 
mediation and fact finding would be required. If settlement were not 
accomplished by a stated date, compulsory arbitration would be re- 
quired. A procedure appointing a "fair" arbitrator or arbitration 
panel would be specified. Arbitration is necessary for agricultural com- 
modities because of their perishability. 

It would be illegal for any farmer to sell a commodity defined within 
the bargaining unit except on terms negotiated by the accredited as- 
sociation and it would be illegal for any buyer to buy a covered com- 
modity except at these terms. 

A procedure for losing accreditations would be established. If an 
association failed to meet the accreditation requirements of represent- 
ing 50 per cent of the producers who sold 50 per cent of the commodity 
within the bargaining unit for two successive years it would lose its 
accreditation. Similarly, if a grievance were filed by a member of the 
bargaining imit claiming the association was not meeting requirements 
for democratic procedures or for non-discrimination, a bearing would 
be held. If the association were found to be in non-compliance it would 
be warden and, if adequate remedy were not taken, the board could 
withdraw accreditation. 

The board would define the buyers' negotiating unit consisting of 
those buying commodities covered by the bargaining unit. Buyers 
would be required to register with the board and the bargaining asso- 
ciation. The negotiating unit for processed products would usually be 
the processors (rather than assembly buyers, for example), and for 
fresh products the negotiating unit could be retailers or associations 
of retailers or wholesalers. Intermediate buyers would be designated as 
agents for the negotiating units and would be required to buy on the 
terms established by negotiations, allowing for a fair return for the 
service they perform. The appropriate negotiating units will vary 
from commodity to comm.odity and according to the use of the com- 
modity. Determining the appropriate level for negotiation would be 
an important and difficult task of the board. 

Bargaining prior to mediation would be between individual buyers 
and the association ; however, the association would be obligated to in- 



46 



form all buyers of any settlements in order to avoid discrimination. If 
mediation or arbitration were required, buyers could be represented by 
an association of buyers organized under procedures established by the 
board. Guidelines would be established for representation of the buy- 
ers' association and to assure equitable treatment, adjusting among 
buyers for differences in transportation, quality, or service. 

The law would exempt associations of farmers and buyers from 
antitrust laws for those activities sanctioned by the board. As a trade- 
off for the antitrust exemption, settlements under the act would be sub- 
ject to review for undue enhancement of price by a three-person com- 
mission appointed by the President. A precedent for this exists in the 
Capper- Volstead Act. 

Tlie board, responding to the initiative of an accredited association, 
would establish one of the three types of bargaining, based upon the 
market situation for each commodity and bargaining unit : 

The first type of bargaining would be for forward deliverable con- 
tracts. The guidelines for the board would be to adopt this type of bar- 
gaining whenever feasible. Contracts would be negotiated prior to im- 
portant production decisions by farmers and would result in produc- 
tion decisions consistent with the anticipated demands of buyers, a 
major breakthrough in coordinating supplies and demands for farm 
products. The association would thus act as an agent in determining 
the quantities of commodities bargaining unit members would be will- 
ing to supply under different terms of trade. Contracts could be nego- 
tiated with contingencies to deal with variations in supply due to 
weather or other unforeseeable events.* 

The second type of bargaining would be for the association to nego- 
tiate the terms of trade, provide information about supplies and de- 
mands to producers and buyers, but leave the actual marketing up to 
the producers and buyers. The association would not disrupt estab- 
lished relationships but would establish the conditions under which 
exchange would take place. This type of bargaining would attempt to 
set terms of trade consistent with anticipated conditions of supply and 
demand. These negotiated terms of trade could also allow for contin- 
gencies of weather and other unforeseen fax;tors affecting supply and 
demand. 

The third type of bargaining would be similar to the second except 
that the association would act as the exclusive sales agent for the 
bargaining unit members and would be obligated to find markets for 
all products and to allocate supplies among buyers. This would grant 
more power to the associations and would result in bargaining to as- 
sure that supplies and demands matched. It would be a less effective 
coordinating mechanism than the forward deliverable contracts but 
more effective than simplv establishing the terms of trade. It would 
also be much more demanding on the association. 

Operations of Associations 

Enabling legislation providing the framework for exclusive agency 
bargaining is a farmers do-it-yourself marketing policy kit and is 
very flexible. The outcome would depend to a large extent on the 
ability of farmers to organize effective, responsible associations. 



* See also, Sporleder and Holder, "Forward Deliverable Contract Markets" in this series. 



47 



The decisions of farm organizations and farmers in defining the 
bargaining unit, in determining the type of bargaining (i.e. over for- 
ward contract terms, acting as exclusive sales agent, or simply es- 
tablishing terms of trade) , and in setting marketing quotas and many 
other aspects of strategy would be critical in determining perform- 
ance. The costs of organizing and the internal management problems 
would be greatest for an association representing a bargaining unit 
for all of a product produced in the United States and bargaining for 
terms for forward contracts. This alternative would also provide the 
greatest opportunity for effective coordination of supply and demand 
and capacity for the association to establish favorable terms of trade 
for its farmer members. 

Least costly in organization and management would be bargaining 
establishing terms of trade for a single buyer. This also offers limited 
advantages in both setting terms of trade and as a coordinating 
mechanism. An association would not wish to impose terms of trade 
which would put a buyer at a disadvantage compared to his competi- 
tors. At the same time, bargaining could assure that producers were 
getting terms of trade equivalent to those offered by other buyers, 
could assure equal treatment for all producers selling to the buyer and 
could establish delivery schedules, quality characteristics and other 
important non-price terms of trade. 

Many possibilities lie between these two extremes of individual buy- 
ers and national bargaining. The type of bargaining which would 
evolve for each commodity would depend upon the circumstances of 
each market situation and the preferences of the majority of farmers. 

Methods of Achieving Exclusive Agency Bargaining 

A very substantial amount of work would be required to obtain 
exclusive agency bargaining legislation. Since the design of the legis- 
lation is critical, time, effort, analysis, and debate will be required 
to determine appropriate and workable rules. Farmers will have to 
recognize the rights of buyers and consumers and make adequate pro- 
visions for their protection. Farmers must also invest their time and 
money in developing responsible and competent associations to repre- 
sent them as exclusive bargaining agencies. 

Major organizational and information efforts would be required to 
put across this concept to farmers. Once farmers were convinced this 
was a desired approach, a major public relations and lobbying ac- 
tivity would be required. 

Because of the uniqueness of the exclusive agency bargaining ap- 
proach, it would probably be desirable to gain experience on a smaller 
scale within a state and with limited commodities before adopting 
a general national policy. The bargained contract system would need 
to evolve from the success and failure of these efforts. Since the gains 
from limited efforts are marginal and costs substantial, farm groups 
will have to be willing to invest in the experiments. 

The major payoff to society from the exclusive agency bargaining 
concept is in supply planning and management. As a production plan- 
ning mechanism, this system organizes the marketing process in a 
way that provides for discovery of terms of trade, including price, 
as well as efficiency in commitment and use of resources over the 
longrun. 



48 



We have outlined the major provisions of possible legislation estab- 
lishing exclusive agency bargaining as a national policy and specified 
some standard operating procedures for bargaining associations op- 
erating under this legislation, important because the rules and operat- 
ing procedures are critical in determining the effectiveness and ac- 
ceptability of exclusive agency bargaining. Note that exclusive agency 
bargaining in the exact form we have outlined does not exist, thus we 
cannot give empirical evidence of success, failures, and problems as- 
sociated with this alternative. As with all the alternatives discussed, 
the authors are describing an alternative and are not advocating its 
adoption. 

SELECTED BIBLIOGRAPHY 

Shaffer, James, "Farm Bargaining Legislation in the Public Interest, Bar- 
gaining Cooperatives." January 13-14, 1974, 

Shaffer, James, "Michigan Agricultural Marketing and Bargaining Act of 
1972," Michigan Farm Economics Pamphlet. Department of Agricultural Eco- 
nomics, Michigan State University, February 1973, No. 361. 

Shaffer, James and Hamm, Larry, "Exclusive Agency Cooperative as a Vertical 
Coordination Mechanism." To be published as a North Central Region Project 
No. 117 in the winter of 1976. 

Torgerson, Randall E., Farm Bargaining. (Oslo: Landbruksforlaget, 1971). 



VERTICAL INTEGRATION THROUGH OWNERSHIP 

(By William E. Black ^ and James E. Haskell^) 



Introduction 

To integrate means to combine two or more stages in the production- 
processing-servicing-marketing complex under one management. In- 
tegration is of two types : horizontal and vertical. Horizontal integra- 
tion achieves economy of scale and market power by (horizontally) 
combining similar functions. An example of this is cattle feeders who 
forego individual feeding operations and turn to a large feedlot to 
feed out their own cattle as well as custom feed. Horizontal integra- 
tion is not part of this paper. 

Vertical integration is defined as ownership-participation in two or 
more steps in the total production-processing-servicing-marketing 
complex by a single business organization. Vertical integration may be 
either forward or backward. This paper focuses on forward integra- 
tion (toward the retailer) by producers for their products rather than 
backward integration (toward the producers) by the food processor, 
convei'ters, or retailers for the products they need. From a producer 
viewpoint, vertical integration means financial participation in facili- 
ties and operations of two or more production, processing, or market- 
ing stages for the commodity he produces. Some farmer cooperatives 
engage in backward integration into the farm input supply industries 
by owning oil wells, phosphate and potash mines, and manufacturing 
plants. 

Vertical integration can also be achieved under centralized manage- 
ment through the use of contracts or agreements. Here the decision 
of two or more firms is coordinated through contracts or agreements 
although ownership may not necessarily be passed from one firm to 
another. 

Vertical integration is not new. It was the common method of agri- 
culture among our self-sustaining settlers who produced, processed, 
and consumed their food within the family. Later, as the era of special- 
ization emerged, more and more of the functions were transferred out 
of the home or off the farm. Separate specialized businesses were cre- 
ated. At first these tended to be single-function businesses. Still later, 
more and more functions were combined to bring about economies and 
control in the operation. The English woolen industry was perhaps the 
first instance of modern vertical integration. Here a single firm carried 
on all processes, from the preparation of the raw material to weaving, 
dyeing, and finishing. 



1 Professor, Department of Agricultural Economics, Texas A&M University. 
'Agricultural Economist, Farmer Cooperative Service, U.S. Department of Agriculture. 
Washington, D.C. 

(49) 



50 



This paper is concerned only with vertical integration by producers 
through ownership. Vertical integration through contracts or agree- 
ments is not considered. Separate papers examine these marketing 
alternatives.^ 

Individual and Group Integration 

Farmers and ranchers may engage in vertical integration through 
ownership either as individuals or as a member of a group. Individual 
integration includes self-sufficiency practices of canning and freezing, 
on farm retailing — including pick-your-own — preconditioning, and 
feeding out calves formerly sold at weaning time. Individually owned, 
vertically integrated businesses are usually internally developed pri- 
vate proprietorships, that is, the owner adds step-by-step to his own 
creation, not through purchase. 

Group integration opportunities are much greater than individual. 
The steps in the integration complex may be purchased or developed, 
and the group-integrated organization may be partnerships, a regular 
corporation, or a cooperative corporation. 

Ownership integration requires more than a mere investment for its 
success; it also requires patronage. In a marketing cooperative, for 
example, producer members must deliver their production, including 
title, to the cooperative. Critical further handling, processing, and 
marketing decisions are assumed and made by the cooperative. These 
commitments are spelled out in a marketing agreement between mem- 
bers and the cooperative and are enforced by the board of directors. 

Examples of vertically-integrated ownership by farmers include : 

Individual Vegetable Grower Shippers. — Larger, more successful 
vegetable growers extend ownership in their crop through harvesting, 
sorting, sizing, packaging and shipping by investing in operations to 
make direct sales to a retailer or hotel-restaurant-institutional distrib- 
tor or by contracting to have certain functions performed by someone 
else. Producers who grow vegetables without a contract and turn their 
crop over to someone else to market are few in number. By combining 
marketing with production the grower strives to extend his control 
over the pricing and the marketing processes, reduce costs, and in- 
crease efficiency. 

Cooperative Corporation. — Formed in 1973 through a consolidation 
of three local ginning organizations in west Texas, the American 
Cotton Growers (ACG) rapidly expanded into a completely inte- 
grated, producer-owned cooperative. Initial objectives Avere to increase 
the profitability of cotton farming by reducing off-f arm handling costs 
and by marketing better cotton and cotton by-products. The producers 
recognized that ginning, compressing, storage, and marketing were 
separate profit centers, each operating independently and each taking 
a bite out of the value of their crop. They therefore created a single 
organization to control all post-harvest operations for their products. 
Each member commits cotton acreage to the cooperative and is respon- 
sible for growing, harvesting, and storing the crop. 

ACG assumes responsibility for all subsequent functions — loading 
and hauling seed cotton, ginning, packaging, lint transportation, stor- 
age, and marketing. In conjunction with the gin, ACG also operates a 



8 Joint venture arrangements, a form of integration, is discussed in a paper in this 
series titled "Joint Ventures Among Cooperative and Non-Cooperative Marketing Firms." 



51 



burr pelleting plant which converts that by-product into cattle feed. 
All cotton is placed in a seasonal pool for merchandising and distribu- 
tion flexibility. Each producer receives the average selling price for 
the crop, less all costs and any capital retains approved by the board 
of directors. From some 40,000 cotton acres originally committed to 
ACG, the cooperative now draws from more than 250,000 acres. In 
addition, ownership-integration has advanced to a textile facility that 
will process cotton into finished denim fabric. From ownership of his 
product through only immediate post-harvest a few years ago, an 
ACG farmer-member can now derive benefits through the sale of 
cloth to cloth manufacturers. 

Corporation. — Monfort of Colorado started as a cattle feeding op- 
eration in 1927. While the feeding operation grew in size, it remained 
essentially unchanged in form until the 1960's. At that time the com- 
pany integrated backward into feed grains by acquiring elevators in 
Kansas and Nebraska. These served as sources of feed supplies. In 
1960 Monfort established a packing plant near the feedlot. Feedout 
capacity increased steadily until it reached 110,000 head in early 1970 
when a second feedlot of equal capacity was built, boosting total feed- 
ing capacity to 220,000 head at one time. Packing-plant capacity was 
also expanded. At the same time Monfort began selling meat through 
company-owned purveyors. With its feed-grain procurement system 
and meat-marketing system, Monfort became a vertically integrated 
operation. The nature of Monfort's verticallj^-integrated-through- 
ownership operation was concisely described in a 1970 prospectus pre- 
pared by underwriters of Monfort's public stock offerings : 

The Company principally engages in purchasing feeder or young cattle, feeding 
them until they are ready for slaughter, slaughtering, breaking, fabricating and 
portioning cattle and lambs and selling individual serving cuts, fabricated cuts, 
primal cuts and dressed carcasses of beef and lamb and their by-products to 
wholesalers, retailers, and others throughout the country and in foreign markets. 

Marketing Cooperative. — American Rice, Inc. (ARI), a centralized 
cooperative, was incorporated in the State of Texas in 1969 to market 
members' rice. It first developed and implemented uniform, statewide 
grading standards and then added a statewide market information, in- 
ventory, an analysis system. In 1971 ARI initiated a successful state- 
wide cooperative marketing program for rough rice with 475 rice 
farmer members representing about 23 percent of Texas' rice-produc- 
ing acreage. Producer-members were required to commit their rice 
production on a marketing agreement and pooled basis. In 1973 ARI 
expanded its marketing service to include Louisiana growers, and, a 
year later, engaged in custom milling of members' rice. In July, 1975, 
ARI acquired Blue Ribbon Rice Mills, Inc., a cooperative. At that time 
it had approximately 325,000 acres of production under marketing 
agreement with 75 percent in Texas and 25 percent in Louisiana. It 
now markets milled rice under Blue Ribbon and other established 
brands. ARI returns to members consistently higher prices than non- 
members receive. 

The above are examples of specific integration indeavors and pro- 
vide and represent only four means out of many possible ways in which 
farmers can integrate forward. But what is necessary for success in 
forward integration? 



52 



Requirements for success 

There are a number of factors that would tend to make vertical inte- 
gration successful. The most important include : 

A Permissible Environment. — The general public plays a part in 
determining how agriculture is structured and controlled. Actions — 
or lack of them — by the government may reflect public attitudes 
toward integration of the food and fiber system. Integration 
through ownership would face severe obstacles if these attitudes were 
unfavorable. 

Ownership of all phases involved in the vertically integrated process. 
The key here is to own the product through as many pricing points as 
possible, even though necessary handling or processing facilities may 
not be owned by the integrator. For example, a firm might ship grain 
through an export elevator on a per bushel fee basis without owning or 
controlling that port facility ; however the firm owns the grain until 
purchased directly by the foreign buyer. 

Capable Management and Staff. — Because vertical integration ex- 
tends ownership, sophisticated management is required. Most critical 
is marketing expertise in the many cases where a firm is engaged in 
product rather than commodity marketing. Decisions of the firm are 
guided primarily by information derived from the market place, not 
production information. This becomes especially clear when vertical 
integration includes dealing directly with retailers and consumers. 

Predictable Supplies. — Vertical integration is economically unsound 
if supplies are uncertain either in terms of quantity or quality. Long- 
term marketing arrangements cannot be consummated without supply 
assurance. Corporate planning for physical, financial, and management 
efficiency is also constrained by uncertain supplies. 

Adequate Capital. — Vertical integration requires additional capital 
for financing physical facilities, management, and the commodity it- 
self. While capital needs for vertical integration are initially quite 
large, financing the integrated operation after it is successfully estab- 
lished is usually not difficult. 

Efficiency. — The vertically-integrated process must be operated effi- 
ciently to remain competitive. Key considerations include the scale of 
operation necessary to achieve economies in production, sufficient mar- 
ket impact, and increased output relative to inputs. Vertical integra- 
tion can bring together technologically complementary production 
processes under single ownership and management. It eliminates some 
sales transactions and increases profits to other transactions. Efficiency 
also can be achieved by improved coordination of the rates, amounts, 
and quality of output at successive stages. 

Market Access and Growth. — A market must be found, maintained, 
or expanded for products produced by farmer-owners. Vertical inte- 
gration can achieve market access faster if the product has an in- 
creasing demand, that is. a higher percentage of the population con- 
suming the product or consuming it at a higher rate or both. 

The Consequences of Vertical Integration 

Effects of a partially or fully integrated agriculture would be felt 
with varying intensities by many different individuals and groups: 
farmers and ranchers, integrated firms, consumers, the community, and 



53 



the general public. Since producers own. and presumably control, the 
businesses in an industry vertically integrated through ownership, 
consequences to farmers and integrated firms are considered together. 

The Participants — Producers involved with integrated firms might 
lose some of their on-farm decision-making prerogatives. The critical 
decisions on assembling, processing, servicing, and marketing could 
be transferred to the firm center. Most of the decisions remaining with 
the farmer would relate to production, but even some of those — when 
and how much to produce, and variety planted — might be made beyond 
the farm level. As a member of a cooperative, the producer would have 
some input about what decisions are transferred to the cooperative. 

Farmers and ranchers are also expected to make firm commitments 
to the integrated system. Part of this commitment may be the require- 
ment that the participant deliver all or a major part of his total pro- 
duction to the system and purchase most of the supplies needed in 
production from that same organization. Other commitments may be 
in terms of contributing money, either through direct investment or by 
capital retains. The integrated firm must have these types of commit- 
ments to carry out its stated objectives: however the competitive suc- 
cess of integrated firms depends more on what the producer delivers 
than what he invests. 

Participation in vertically integrated firms should provide farmers 
and ranchers stifficient benefits to compensate for loss of marketing 
freedom. One benefit is the transfer of the risk of some price fluctua- 
tions away from the producer. Prices for farm products in an inte- 
grated firm are determined by formula, pools, blends, or other methods 
outside the traditional open market and represent some kind of "aver- 
age" price over the marketing period. Xo longer would the farm-gate 
price determine success or failure of the farming operation. 

Producers also share in any profits (or losses) generated at pricing 
points added to the integrated system. Vertical integration increases 
the market power base of producers by extending ownership control 
of assets and products. Other potential advantages accrue to vertically 
integrated business, including more efficient resource allocation, reduc- 
tion in costs, and incentives for technological advance. 

An industry vertically integrated through ownership does not re- 
flect commodity and product prices at the various stages of the system. 
Several groups might be interested in those prices for different rea- 
sons — producers, consumers, the competition, and perhaps even the 
government. Many integrated firms accumulate profits at only one 
stage of the total operation, accounting for other transfers at cost ; 
others make no attempt to determine prices at each level. When inte- 
grated operations account for a large part of total industry volume, 
it is nearly impossible to accurately reflect prices associated with the 
product or commodity. This makes it especially difficult to monitor 
or control, even by producers, integrated operations from an equity 
standpoint. 

In many cooperative marketing arrangements only partial payment 
is made to the producer at time of delivery. The balance is paid after 
the cooperative sells the product. Producers might find it difficult to ad- 
just to a system which doesn't pay on deliver\\ Many producers prefer 
to use the open market price as a continuous barometer of how they're 
doing pricewise in marketing their production. 



54 



Vertical integration can increase or decrease competition within an 
industry, depending on the concentration of that industry at the time 
integration is introduced. If the industry is already dominated by a few 
large firms, integration would tend to increase competition ; but entry 
of vertically integrated firms into a dispersed market structure can 
lead to decreased competition in the industry, particularly if the num- 
ber of firms in the industry is reduced as a result of that integration. 

The extent of integration also affects the conditions of entry and exit 
of firms. If vertical integration is successful and captures a significant 
portion of the market, other firms will find it difficult to enter the in- 
dustry, especially if the integrated firm captures that market share via 
a brand product. Entry into many industries is virtually closed today 
because of the existence of successful integrated firms. 

Finally, successful integrated firms are market oriented. In effect 
this means the firm combines business and marketing functions with 
the tools of management in a mix that best serves consumer wants and 
needs and is still consistent with the objectives of the producer-owners. 
Vertical integration can provide access to the retail shelf. The goal of 
market orientation is to own the product through as many pricing 
points as the integrated firm can convert into profit points. The latter 
point serves as a guideline for further vertical integration. There is an 
incentive to expand only so long as ownership through another pricing 
point is profitable. The economic limit to ownership-integration is de- 
termined in that manner. 

To summarize, producers can potentially benefit from a vertically 
integrated system by higher profits (a combination of reduced costs, 
more efficient resource allocation, and ownership of the commodity or 
product through more than one pricing) ; reduced risks ; and market 
power. Most of the disadvantages arise from a necessary change in the 
traditional way of doing business. Producers lose some of their 
decision-making power in marketing; have to make binding product 
and financial commitments to the system; and lose the option of selling 
their production in the open market. 

The Commwfdty. — Vertical integration by farmer cooperatives 
might aid in preserving existing rural community patterns by main- 
taining the role of the individual farmer. Because ownership of pro- 
ductive resources remains at the local level there is greater producer 
involvement in decisions to locate additional production and marketing 
facilities. Integrated businesses located in a community create a larger 
tax and employment base and increase service demands. On the other 
hand, some communities would suffer by not having the businesses 
located in their proximity, or by having supply procurement take place 
outside the area. Increased integration through ownership would result 
in some reduction of the total work force in agriculture-related func- 
tions, and local decision-making could be lost if integration was 
brought about by outsiders. 

The Consumer. — Integrated systems have the potential to achieve 
greater cost savings from coordination of production, processing, and 
distribution, and the elimination of unneeded facilities, but lower costs 
of food and fiber to consumers cannot be assured. It may prove socially 
and economically detrimental to consumers. Producers might gain and 
consumers suffer higher prices if the market power achieved by the 
integrated firms is used to reduce competition and restrict supplies. On 



55 



the other hand, if consumer demands are accurately identified, the pro- 
ducer-owned system could quickly respond with more and higher qual- 
ity products. Producers are more apt to engage in new product develop- 
ment, marketing innovations, and other consumer responses if they are 
part of a vertically integrated system. 

The General P'^^ZzV.— Integrated firms would be expected to take on 
a larger share of research, development, and education programs now 
funded through state and federal taxes. The complexities and individ- 
uality of integrated operations require greater research on their part. 
Widespread vertical integration might also reduce needed government 
expenditures for the price support program. 

Methods of Achieving Vertical Integratiox 

Farmers and ranchers who want to be a part of an integrated system 
can either do it as an individual or as a member of a group. Those who 
wish to go it alone must develop the system over time. Those who opt 
for membership in a group can also develop the system over time ; or, 
they can buy it. Most commercial farmers engage in vertical integra- 
tion through ownership as a member of a group because risk can be 
spread out over more producers, capital requirements per farmer are 
less, and the opportunities for success are enhanced through a bigger 
scale of operation, export management, and marketing skills. 

One-Person Integration. — Farmers and ranchers can, and have, de- 
veloped integrated businesses on their own. This is illustrated by the 
cow-calf producer who decides to retain ownership beyond weaning. 
Assuming part of his land is suitable for cultivation, he could reduce 
his cow numbers and put some land into small grains for feeding after 
the calves are weaned. (Supplemented grain may be fed while calves 
are on the small grain.) If the land of the cow-calf producer is not 
suitable for cultivation he can still integrate vertically by custom 
grazing his calves on someone else's land at so much per pound of grain. 
Regardless of which practice is followed, ownership in the calves is 
retained. After preconditioning, calves are normally sold. The degree 
of vertical integration can be extended by retaining ownership through 
the feedlot. If followed this system would extend control by the cow- 
calf rancher (he participates in more than one pricing point) and 
reduce the number of sales the calf goes through. It could increase 
efficiency and profits and/or decrease costs. 

It is important that producers who want individual integration 
recognize how conditions change from their usual mode of operation. 
First, more money is required over a longer period of time. When- 
ever additional functions are assumed, the capital requirements also 
increase. In the cow-calf example, the producer must obtain capital 
to purchase the machinery and supplies required to raise grain, or to 
pay rent if he decides to custom graze the calves and carry the inven- 
tory longer. Second, the type and quality of management required to 
run an integrated operation differs from a nonintegrated, traditional, 
production-oriented farm operation. New management skills must be 
learned or acquired. Finally, producers must be willing to live with 
postponed income, especially for the first year or two. Benefits from 
ownership integration are not immediately available because it takes 
time and money to develop an effective and profitable system. Initial 



56 



cash flow problems may be eased somewhat through careful attention 
to accounting methods. For example, it might be easier for an indi- 
vidual to integrate forward if he changes from the cash to the accrual 
basis of reporting taxable income. 

Group Integration. — Producers at times can more easily integrate 
forward through ownership as a part of a group. A producer can either 
join other producers in common ownership of corporation or become a 
member of a marketing cooperative. The organization may already be 
integrated through more than one pricing point — marketing, proc- 
essing, and retailing — or may be a single function operation. In other 
cases, farmers can join together to form a brand new integrated or- 
ganization : by comlDining their money and ideas, they can either pur- 
chase an operation outright or develop what they want over time. 

Farmers and ranchers have many good reasons for joining together 
in an integrated system rather than trying to develop it as individuals : 
they can probably achieve the efficiencies of economies to scale; they 
can hire expert management; marketing decisions can be moved up 
to more appropriate levels; large capital investments for physical 
facilities can more easily be made ; members have the opportunity to 
share in marketing profits; and participants are protected, to some 
extent, from price fluctuations for their particular commodity. 

Farmer cooperatives currently face the danger that legislation un- 
dergirding their ver}^ existence might be seriously eroded by either 
legislative, judicial, or administrative action. The Capper- Volstead 
Act is of greatest concern. Without it farmers could not even form 
a cooperative for the purpose of jointly marketing their products. If 
fanners and ranchers desire to continue to use cooperatives as a means 
of integrating forward then the}^ must insure continuation of the kind 
of treatment provided by Capper- Volstead. 

SELECTED BIBLIOGRAPHY 

Bowersox, Donald J. and McCarthy, E. Jerome, "Strategic Development of 
Planned Vertical Marketing Systems," Vertical Marketing Systems. Ed. Louis P. 
Bucklin, Glenview, Illinois ; Scott, Foreman and Co., 1970. 

Harris, Marshall and Massey, Dean T., "Vertical Coordination Via Contract 
Farming." U.S. Department of Agriculture, Misc. Pub. 1073, March 1968. 

Mighell, Ronald L. Hoofnagle, William S., "Contract Production and Vertical 
Integration in Farming, I960 and 1970." U.S. Department of Agriculture, ERS- 
479, April, 1972. 

Mighell, Ronald L. and Jones, Lawrence A., "Vertical Coordination in Agri- 
culture." U.S. Department of Agriculture, ERS Agr. Econ. Report 19, Feb. 1963. 



JOINT VENTURES AMONG COOPERATIVE AND 
NON-COOPERATIVE MARKETING FIRMS 

(By Lester H. Myers,^ Michael J. Phillips,' and Ray A. Goldberg') 



IXTRODUCTIOX 

Coordination of marketinir activities may be obtained through joint 
ventures between a^^ricultural marketinfr cooperatives and non-co- 
operative agribusiness firms.^ Joint ventures are defined here as as- 
sociations between two or more participants organized for tlie purpose 
of implementing and conducting a specific marketing operation or 
enterprise. The identities of the participants remain apart from then- 
co-ownership or co-participation in the venture. Participants share — 
on an aareed basis — expenses, profits, losses, risks, and some measure 
of control over the conduct of the venture operation. Various forms of 
business organization (partnership, corporation, or cooperative) ma\^ 
be adopted for the conduct of the venture's business. AVhile the yen- 
ture may perform one or more of a variety of marketing functions, it 
is assumed here that the activities involve either a direct marketing 
function or the procurem.ent or manufacturing of inputs needed in 
the processing and/or marketing functions. Contract agi-eements for 
the sole purpose of assuring a supply source or a market outlet are 
not considered joint ventures within the context of tliis paper. 

^lany factors may serve as motivating forces for the creation of 
joint ventures between cooperatives and non-coopei'ative firms. Pro- 
ducer cooperatives may see the venture as a way of gaining access to 
consumer markets, some assurance of potential price premiums, and 
the opportunity to realize the benefits of economies of scale. Agri- 
business firms may be looking for partial insulation fi'om uncertain 
commodity supplies, for access to lower credit costs, or possibly for a 
way to minimize the effects of possible governmental pi-ice freezes and 
other regulatory policies. 

Joint ventures between cooperative and non-cooperative corpora- 
tions have received further impetus as producer groups and off- farm 
operators attempt to coordinate not only the United States domestic 
commodity systems but the internatioiial ones as well. It is very pos- 
sible that some of the more meaningful joint ventures may develop 
between commodity producers in the United States and multi-national 
agribusiness finns in other countries and vice-versa. 



1 Associate Professor, P'ood and Eesource Economics, University of Florida. 

2 Agricultural Economist, Farmer Cooperative Service, United States Department of 
Agriculture. 

3 Oeorpe M. Moflfett Professor of Agriculture and Business. Harvard Business School. 
* Editor's Note. — Joint venture arrangements imply ownership by two or more corporate 

entities. A.gricultural economists tend to refer to this as integration in the sense that 
one firm has now entered into partial ownership of another stage in the production or 
marketing channel. 

(57) 



58 



In the followintr section, several examples of existing joint ventures 
are summarized. These particular examples are selected to illustrate 
diverse motivations, types of projects, and de<rrees of success associated 
with joint ventures. 

Examples of Existing Joint Ventures 

Agway — Curtis-Buims — Pro-Fac. — In 1960, Agway, a producer co- 
operative based in Syracuse, New York, was instrumental in consum- 
mating a meroer between Curtis Brothers and Burns Alton, two small 
fruit and vegetable canners. Agway took a 58 percent stock interest in 
the ncAv company and then formed Pro-Fac, a cooperative that supplies 
raw commodities to Curtis-Burns. 

Curtis-Bums leases the plants owned by Pro-Fac, processes the 
crops of Pro-Fac grower members, sells the finished products, and 
pays Pro-Fac from the proceeds. Curtis-Burns also uses funds bor- 
rowed from Pro-Fac as working capital. This arrangement gives Cur- 
tis-Burns high capital leverage. 

Pro-Fac grower members supply about 90 percent of the crops 
processed and sold by Curtis-Burns. Members' principal crops are 
green and wax beans, corn, beets, green peas, cabbage, asparagus, 
tomatoes, potatoes, and apples. Curtis-Burns sells about 60 percent of 
its volume directly to chain buyers and the remaining 40 percent to 
brokers. About 90 percent of its products are processed for the pri- 
vate label trade. Growers are paid 50 percent of the estimated commer- 
cial market value of their crops 30 days after delivery of their entire 
crop. Commercial market value (CMV) is defined as the average of 
what the industry is paying in the appropriate market area. An addi- 
tional 25 percent is paid within 120 days after delivery, and to the ex- 
tent earned, the balance of the CMV is paid as soon as is practical 
after the close of the fiscal year. 

While net proceeds from Curtis-Bums sales fell below commercial 
market value in 1970, the growers have received price premiums above 
CMV from 1971 through 1974. 

The major advantages of this joint venture are: 

• A guaranteed market for Pro-Fac grower members and the 
potential for price premiums. 

• An assured supply of raw product to Curtis-Burns from the 
cooperative avoids underutilization of processing capacity. 

• By owning the facilities as well as supplying the raw product, 
the cooperative can transfer the savings to the producer who is 
taxed on an individual basis, thus generating a faster cash flow 
for Pro-Fac. 

• The management team and certain other employees of the 
Curtis-Burns company can be given incentives through stock 
options, not available to cooperatives. 

• Pro-Fac growers are able to expand production because of the 
broad product line capabilities of Curtis-Burns. 

The major disadvantages of this joint venture are: 

• It severely limits the processor's raw materials supply options 
and the cooperative's market outlet. 

• If the venture is successful it may become the price leader for 
the raw product and leave an insufficient price mechanism to 



59 



determine an equitable transfer price from the company to the 
cooperative. 

Florida Orange Marketers — Minute Maid. — In 1969 an agreement 
was reached between Florida Orange Marketers (FOM), a producer 
cooperative, and the Coca-Cola Company's Food Division, of which 
Minute Maid is a part, in an attempt to establish a fair transfer price 
for oranges. The agreement provides that the income to the co-op 
member and to the company will be based on the FOB prices of pri- 
mary and by-products at the time of shipment from Minute Maid. The 
company procures approximately one-third of its orange supply from 
FOM. Because of brand image and quality control, Minute Maid 
orange juice has enjoyed a price premium in the market place. Despite 
higher advertising and marketing costs than private label packers, 
much of the price premium is passed back to the producer. Histori- 
cally, FOM growers have realized five to seven cents per pound of 
orange solids above the industry average. The company's share of the 
FOB price is limited to an amount covering its processing, marketing, 
and R&D costs connected with the utilization of the oranges. FOM 
maintains some control over the final utilization of the oranges, and 
Minute Maid has the authorization to limit the quality and amount of 
oranges they will accept from FOM. 

The advantages in this kind of joint venture are: 

• The company is assured a steady supply and the co-op is guar- 
anteed a market, like many joint ventures of this type. 

• Since the cooperative shares in the end-product profitability, 
the producer benefits from the company's research and its adver- 
tising and promotion skills. 

The disadvantages in this kind of joint venture are: 

• The producer assumes all risk of fluctuations in FOB prices 
since the processor is guaranteed a processing and marketing 
margin. 

• Growers are more directly affected by the growing labor tur- 
moil in agriculture. By joining forces with a major brand com- 
pany, which is vulnerable to a national boycott, growers may be 
adversely affected. 

• Growers may have to find other markets for some of their 
production since Minute Maid negotiates for fixed volumes of 
oranges. 

Heuhlein — United Vintners. — Allied Grape Growers, a California 
cooperative with about 1600 members, acquired United Yintnors (UY) 
in 1959. UY provided the processing and marketing skills needed by 
the growers to market their grapes effectively. 

After the merger the wine industry underwent changes, including 
the development of new products and mechanization of grape harvest- 
ing and processing. Thus growers experienced a need for expanded 
capital reserves to finance mechanized vineyard production and, in 
addition, to finance new processing equipment and marketing programs 
associated with their processing cooperative. 

To expand and compete more effectively. Allied Grape Growers be- 
gan to seek sources of capital other than that provided by its members' 
revolving fund. Heublein was interested in getting into the domestic 
wine business and made Allied an offer for UY. AUied's board indi- 



60 



cated no interest in a sale, but was receptive to a joint venture with 
Heublein. As a result Heublein acquired an 82 percent interest in UV, 
and Allied retained an 18 percent interest. 

The key element of the deal, assuring producers of a market and 
Heublein of a source of supply, was a pre-merger contract drawn up 
between Allied Grape Growers and United Vintners. The twenty-year, 
renewable agreement called for Allied to be the exclusive supplier of 
domestic grapes for UV at the quoted average market price plus a pre- 
mium equal to twenty percent of UV pretax profits. 

Over time this venture has not performed to the satisfaction of both 
parties, and its status is in current litigation. Because of the unre- 
solved issues concerning this venture it is not feasible to speculate in 
this paper on the causes of the unsatisfactory performance. For what- 
ever reason, since the venture began UV has not realized a profit. Thus, 
the illustration that joint ventures are not automatically successful. 

The advantages in this kind of joint venture are : 

• The marketing firm enters a new business which is complemen- 
tary to its existing product line and marketing skills. 

• The cooperative gains access to needed capital, to broader mar- 
ket distribution, and to an established brand franchise. 

The disadvantages in this kind of joint venture are : 

• Unequal equity interests by the two participants can lead to 
little or no management control by the party with the minor 
interest. 

• Since the contract calls for the minority interest party to be 
paid a premium based on the venture's profits, the determination 
of those profits could lead to one party or the other or both being 
dissatisfied with the transfer price. , 

Conditions Necessary for Joint- Venture Success 

Joint ventures, like any other business enterprise, are not auto- 
matically successful. While all factors contributing to a successful ven- 
ture probably cannot be identified, a number of important ones are 
outlined in this section. 

Equitable Agreemen t, — Perhaps the most important aspect of a joint 
venture is the original agreement between the cooperative parties. Ex- 
treme care must be taken to safeguard against unfair dominance by 
one firm or the other. Specifically the agreement should assure the 
following : 

(a) Terms of ownership. Each party should have clearly speci- 
fied claims to the venture's equity and capital assets. 

{h) Management control. Voting rights of both partners should 
be specified. In general, the closer the voting proportions are to 
being equal, the more likely the chance for success. 

{c) Supply and market contracts. The producing cooperative 
must assure a certain level and quality of raw products while the 
marketing firm must agree to market the output from the venture. 
It may be desirable to allow the venture to secure supplies from 
growers outside of the participating cooperative during certain 
periods to maintain an efficient operation and to assure continuous 
market supplies. 



61 



{d) Equitable pricing formulas. Growers should have a clear 
understanding of the transfer price determination. If the price 
includes a premium based on the profit performance of the ven- 
ture, the agreement should specify how profits are to be measured, 
and growers should maintain sufficient management control of the 
venture operation to assure pursuit of the profit objective. 

{e) Unusual changes in the economic or agronomic environ- 
ment ma}^ lead to adjustments in the joint venture. Machinery 
should be established for making these changes as a joint-venture 
is a dynamic and changing relationship. 
Operation and Management. — The venture enterprise must be ex- 
pertly managed. It is quite likely that both participating firms may 
need to look outside their respective organizations for management 
personnel. The operation must be large enough to operate efficiently. It 
must serve an industry need ; that is, it should either provide an exist- 
ing service more efficiently or provide a new service. 

Adequate Capital. — Joint ventures sometime require additional 
capital for acquiring facilities, management, and the raw product. 
This should not be too difficult because the partners in the venture can 
exploit each other's financial resources. The company can make use of 
the Bank for Cooperatives, and the cooperative has access to the com- 
pany's many sources of funds. 

Market Access. — A market must be found, maintained, or expanded 
for the products of the venture. Emphasis for the cooperative partner 
must be on delivering a commodity to the corporate partner that meets 
the needs of the market. 

Social and Political Environment. — Public attitudes toward joint 
A'entures between producer cooperatives and non-cooperative firms are 
important factors in determining whether or not this type of structure 
will develop and persist. An important aspect is the ability of the co- 
operative to remain a cooperative and not be jeopardized by the venture 
agreement. Governmental action, reflecting public opinion, must be 
favorable if such ventures are to succeed. 

Potential Impact on Joint- Venture Participants 

Expected economic, financial, control, and management implications 
resulting from a joint venture depend, to a critical extent, on the par- 
ticular characteristics of the involved firms, the economic environment 
v/ithin which they operate, and the nature of the joint venture. This 
section considers likely effects on the producer cooperatiA^es and non- 
cooperative firms actually involved in the venture. 

Management Innovations. — Joint ventures almost certainly result 
in management revisions for the involved participants. The project 
may result in a consolidation and/or transfer of certain marketing, 
transportation, and processing function. This in turn might facilitate 
coordination of the production and marketing functions resulting in 
tighter management control. It may also mean a loss of some manage- 
ment freedom of choice on the part of one or all partners with respect 
to choice of market, source of supply, and/or timing and quality of 
production. A trade-off may develop between better coordination and 
cost control and the loss of freedom to choose the most advantageous 
market or supply source. 



62 



Both firms will have to learn to make joint management decisions 
with respect to the operation of the venture. Quite often conflicts may 
develop because of the differing goals of the participating firms. The 
ability to overcome these conflicts should result in positive benefits to 
both growers and agribusiness. 

In general, one would expect the necessary management innova- 
tions for a successful venture to have beneficial impact on all 
participants. 

Monetary Impacts. — The joint project may have a financial impact 
to the cooperating partners. Cost efficiencies would likely result from 
better coordination of the supply, processing, and marketing functions. 
Finally, costs may be lowered because of reduced uncertainty with re- 
spect to supply procurement and market outlet. 

Joint ventures may also alter normal pricing mechanisms. Products 
wdiich previously passed through an open market may now become 
essentially an intermediate (output) input. The price attributed to 
this intermediate product may be based on the value of final output less 
processing charges; a specified formula based on quality, volume, and 
final use characteristics; or an "arm's length*' competitive price. Thus 
the venture may result in pricing efficiencies or pricing inefficiencies, 
depending on the unique aspects of the venture agreement. 

Another financial factor involved in joint venture decisions relates 
to credit and cash flow alternatives. Depending on the venture agree- 
ments, the non-cooperative participant may gain access to the coopera- 
tive's credit sources and to some or all of the cooperative's non-equity 
surplus. Cash flow may be faster because of the standard cooperative 
law requiring producers to pay a single tax on earnings. Access to the 
non-cooperative's capital reserve and credit sources may allow coopera- 
tive grower members more capital to devote to production activities. 

Sharing of Risk. — All parties to a joint venture will probably realize 
som.e changes in the risks they usually bear. Producers, through the 
cooperative, may become insulated from the usual short-term fluctua- 
tions in farm-level prices. Grower prices, based on the actual sales 
value of the final processed product less processing and storage charges, 
will normally be less varial3le than farm-gate cash-sales prices. Thus, 
the timing of producer sales become less critical. However, by having 
his price based on processed product values, the producer assumes all 
risks of price changes at the wholesale level; or, depending on the 
nature of the venture, at the retail or consumer level. Since prices tend 
to be less variable as the pricing points move closer to the consumer 
level, the net effect to producers should be a decrease in the risks as- 
sociated with price variability. 

The non-cooperative partner should realize a decreased risk cost. 
Some of the price variability risk associated with open-market supply 
procurement will be eliminated and some will be passed back to pro- 
ducers. The joint venture wath a producer cooperative will also de- 
crease some of the uncertainty problems associated with undependabk' 
raw product supplies. 

Product and Market Enhancement. — The venture may result in a 
successful product innovation. This may take the form of quality im- 
provement, packaging and processing changes, some degree of brand 
differentiation, and/or supply stability. The net effect would be an 
increased consumer demand for the products produced by the joint 



63 



venture participants in which case all participants to the joint venture 
would realize benefits from the expanded demand. 

Some negative effects are possible. Should the joint venture result 
in a national-label brand-franchise, growers may suddenly find they 
are producing a product easily identified by consumers. While this has 
positive aspects, it could also make the producers more vulnerable to 
sudden changes in consumer preferences. Examples include boycotts, 
health scares, and labor disputes. 

Market Structure and Perjormunce. — As with integration through 
ownership, joint ventures might decrease or increase competition 
within an industry. The joint venture might represent the only feasible 
way of entering a segment of the subsector dominated by a few large 
firms. On the other hand, the venture itself may be large enough to 
be a dominating force. In the latter case, entry possibility by compet- 
ing firms may be decreased, hence less competition. 

For most of agriculture it would appear that joint ventures would 
lead to more equalization of market power between producer groups 
and large marketing firms. This in turn should result in negotiated 
sales terms which are more equitable to both producers and consumers 
than when the market power is concentrated at one level in the market 
channel. 

Potential Impact on Non-Participants 

The economic effects of a joint venture external to the immediately 
involved partners must also be considered when determining the worth 
of the structural arrangement to society. Unlike the traditional family 
farm, which can act pretty much in its own self-interest with little 
noticeable effect on society, actions taken by large producer coopera- 
tives and large agribusiness corporations do have a ripple effect 
throughout the econom^y. The results may have implications with re- 
spect to pricing efficiency, accessibility to markets, informational flows, 
volume and quality of consumer goods produced, freedom of producer 
and consumer choice, and governmental regulation. 

Non-participants Within the Industry. — Consider first the possible 
effects on competing growers, processors, and distributors. The net ex- 
ternal effects to this sector are dependent upon the ultimate result of 
the joint venture. For example, assume that the venture results in a 
demand-enhancing product innovation. If the venture expands its 
market via a branded product, competing firms may experience a de- 
creased market share and more difficult conditions of entry. On the 
other hand, the product innovation may be diffused rapidly through- 
out the industry with an overall market gain. 

Ventures that result in cost efficiencies will give the participating 
firms an economic advantage over competing firms. Depending on the 
relative market share of participating and non-participating firms, 
outside firms could find themselves at a disadvantage serious enough 
to either force them out of business or into an integrated or joint-ven- 
ture structure. 

As with ownership integration, joint ventures which control a domi- 
nant market share may result in the loss of market information at one 
or more pricing points within the marketing system.^ Thus producers 



^ "Mandatory Public Reporting of Market Transactions" in this series discusses this- 
problem. 



64 



and marketers outside the venture may have difficulty determining 
equitable transfer prices. An opposite effect could occur when the ven- 
ture resulted in increased competition within the industry. 

Conmmers. — The consumer could benefit from joint ventures in 
several ways. Improved coordination of supply, processing, and mar- 
keting activities will result in cost efficiencies, some of which will be 
passed on to the consumer in the form of either lower prices or a wider 
choice of product or both. Many times an integrated firm may be able 
to respond more quickly to changes in consumer preferences than the 
open market system because of better communication between market- 
ing and producing entities. 

Xegative results for the consumer could occur if the joint venture 
results in a concentration of market power to the extent that economic 
gains are not passed forward and the market mechanism is no longer 
able to adequately reflect changes in consumer wants and needs. 

Government. — Joint ventures could result in a loss of public infor- 
mation as more open market functions become internalized. This loss, 
in turn, may result in higher governmental costs of regulation. 

Positive benefits could accrue from the improved coordination with- 
in tlie system or increased competition. This may result in less need for 
agricultural commodity programs at the federal level. 

Implemextatiox 

The exact procedure for implementation of a joint venture is, of 
course, unique to the particular circumstances. In this paper we can 
only suggest some very general guidelines. 

For producer cooperatives who want to become a part of an inte- 
grated system via a joint venture, the primary requisite is to find a 
partner. To do that the cooperative must have something to offer the 
partner in the venture and vice-versa. For example in the FO^I- 
Minute ^laid example. FOM liad the quantity and quality of oranges 
required by Minute Maid and Minute ]Maid offered FOM a needed 
market outlet with the added benefits of an established brand fran- 
chise. In the Heublein-United Vintner example, United Vintner had 
a processing-marketing s^'stem and Heublein offered a larger market 
and adequate capital. 

To be in a position to offer a potential partner something unique, 
as the previous examples indicate, usually requires investment by the 
<?oo];erative. Farmer-members must be willing to invest in processing 
facilities, patents, or quality control programs that signal to a po- 
tential partner further up the .marketing chamiel the cooperative 
has something to offer which complements their operation. 

Prior to a joint venture agreement, the management of both partners 
should explore the areas of possible conflict between the firms. They 
should also develop a clear statement, understood by all partners, of 
the marketing objective to be fulfilled by the venture. Those two imple- 
mentation steps are essential to the minimization of serious conflict 
of interest after the venture becomes operational. 

Implementation also involves decisions regarding location of facili- 
ties, size of operation, and capital needs. Outside consultation services 
may be required to assist in these decisions. 



65 



SELECTED BIBLIOGRAPHY 

Goldberg, Ray, "Profitable Partnerships: Industry and Farmer Coops." Har- 
vard Business Review, March-April, 1972, pp. 108-121. 

Hulse, Fred E., Phillips, Michael J., "Joint Ventures Involving Cooperatives 
in Food Marketing." Marketing Research Report No. 1040, Farmer Cooperative 
S?ervice, U.S. Department of Agriculture, Washington, D.C., May 1975. 

"The Broiler Industry," Vol. 38, No. 8 (August, 1975), pp. 23-34, Garden State 
Publishing Co., Sea Isle City, N.J. 



MARKETING ORDERS 



(By Walter J. Armbnister.^ Truman F. Graf,'' and AUlen C. :Manchester ^) 



IXTRODUCTIOX 

In the 1930's the seasonal and annual price swmgs associated with 
the quantity variability of agricultural products were compounded by 
weak farmer bargaining power. This resulted in wildh' fluctuating 
farm prices over long periods of time, and production cycles in which 
excesses Avere followed by deficit supplies. The uncertainty about 
whether prices would be above or below costs of production was un- 
acceptable, thus federal and state marketing-order programs were 
initiated in an attempt to bring orderly conditions to chaotic markets. 
Since their inception the programs — used for milk, fruits, vegetables, 
and specialty crops — have met a stated need, but changes in the market- 
ing system and economic situation have resulted in recent pressures 
to re-evaluate the purposes of or even eliminate marketing order 
programs. 

Marketing orders provide a mechanism by which producers may 
initiate programs to regulate marketing of their commodities through 
unified action. Orders can be requested by farmers on a federal or state 
level, and can be implemented by a vote of those affected. The regu- 
lated crop, production area, or specified utilization is defined in the 
market order, and the regulations are obligator\^ on all sales of the 
covered commodity. Use of a marketing order to institute regulations 
makes all producers who benefit from the program share the burden 
of activities used to achieve tlie gains. The Secretary of Agi^iculture 
administers the orders and usually on the advice of a Board of farmers. 
The costs of administering the programs are collected on a per-unit 
basis from handlers and farmers, with no tax funds involved. 

Marketing orders are often referred to as farmer self help programs. 
The intent is to provide a means whereby farmers can exercise some 
degree of control of the quality and quantity that goes to market so 
that their incomes will be more stable and the quantity and quality 
going to consumers would be more stable and uniform. 

Federal orders for milk set minimum prices, while those for fruits, 
vegetables and specialty crops affect price through quantity and qual- 
ity regulations. The administration of federal milk orders is carried 
out through operating rules that cause changes in prices when cer- 
tain conditions are met. Fruit and vegetable orders are administered 
by establishing periodic levels of regulation based on recommenda- 
tions made by market order committees comprised of industry mem- 

lAgricuUural Economist, Economic Research Service, U.S. Department of Agriculture, 
Washington, D.C. 

3 Professor, Department of Agricultural Economics, University of Wisconsin. 
'Agricultural Economist, Economic Research Service, U.S. Department of Agriculture, 
Washington, D.C. 

(66) 



67 



bers. Provisions of state market orders vary among states more than 
do provisions of federal orders in the different states. 

Minimum Price-Setting for Milk. — Federal milk-marketing orders 
set minimum prices for raw fluid grade milk which must be paid by 
processors to dairy farmers (usually through farmer cooperatives). 
State orders set minimum farm, wholesale, and retail prices, depend- 
ing on the state involved. Most fluid grade milk produced for fluid use 
is priced under state or federal orders; prices for manufacturing 
grade milk, produced specifically for butter, cheese or powder pro- 
duction, are determined in an open market environment. 

^Minimum prices according to product use are established for federal 
and state marketing orders on the basis of specified relationships to 
the Minnesota-Wisconsin manufacturing grade milk price.^ With a 
few minor exceptions, prices for all milk including fluid grade milk 
that is used in manufactured dairy j)roducts are at or near the Minne- 
sota-Wisconsin price base, while prices for milk for fluid use. usually 
specified as Class I, are higher b}' fixed differentials. The differential 
X^artially reflects differences in costs of more expensive production fa- 
cilities required to meet the sanitary regulations for Grade A milk, 
and differences in marketing and transportation costs. 

Since 1958, farmer cooperatives have negotiated ''super pool'' pre- 
miums over minimum order prices in many federal market order areas. 
These premiums are intended to cover production costs that may be 
above the minimum price set by the market order. 

Regulations for Fruit and Vegetables. — Federal market-order pro- 
grams for fruits and vegetables are designed to deal with product 
variability and to fit fluctuating supplies to market demand. They rely 
primarily on quality control, market flow, and volume management to 
enhance the level and stability of producer returns.^ These provisions 
regulate supply variables to take advantage of markets differing in 
quality requirements, the form in which a product is to be used, the 
timing of demand, and location. 

Quality control regulations specify minimum grades and sizes mar- 
ketable. By improving the degree of uniformity and reliability in 
general qualit}' , prices increase, and the price of higher quality prod- 
ucts is kept above what might otherwise occur. Market flow regula- 
tions, primarily used in citrus marketing programs, limit fresh market 
shipments in periods of greatest product availability in an attempt to 
prevent low prices and product waste. Volume management regula- 
tions restrict supplies of storable dried fruits and nuts going into 
]:)rimary markets — usually the fresh or domestic markets — either 
through reserve pools, producer market allotments or diversion of 
excess supplies to alternative outlets, such as export or nonfood use. 
Several supplementary provisions are widely used to improve physical 
characteristics, the image of the commodity, and its marketing system, 
thereby reducing costs or increasing returns. These provisions specify 
standard packs and containers, fund research and development activi- 



* This is the average price paid for manufacturing grade milk by a specified number 
(sample) of plants that buy milk directly from farmers as reported by the agency of the 
U.S. Department of Agriculture. 

5 Twenty-two of the 48 existing market order and agreement programs for fruits, 
vegetables, nuts, and specialty crops contain provisions for direct regulation of quantities 
marketed. Most quantity regulation orders also contain provisions for grade and size 
regulation, however 26 orders allow only grade and size regulation. 



68 



ties, and provide a funding mechanism for commodity advertising and 
promotion. 

Possible Future Uses of Market Orders 

Marketing orders provide a means through which farmers can gain 
better access to markets and improve market performance and pricing 
efficiency. While milk price-setting and quantity and quality regula- 
tion for fruits and vegetables are the principal current uses of market- 
ing orders, they could be extended to cover additional commodities of 
the same types now covered, or to cover commodities not now covered, 
such as livestock, grain, and fish. Or provisions authorized under the 
orders could be applied to commodities or situations where they are not 
now being used. The classified pricing system used for milk could be 
used for fruits, vegetables, and meat, with fresh products priced at 
levels different from processed. Or the marketing order could be ex- 
tended to provide funds for new tools such as the development and op- 
eration of a centralized remote access market. A discussion of some of 
the more important possibilities follows. 

Ex f and National or Regional Coverage. — Marketing orders could 
be established to obtain more national or regional market coverage. 
Orders encompassing the entire commercial production area for fruits 
and vegetables, whether in one state or several, appear to be the most 
successful because they eliminate the possible problem of competing 
production areas expanding production in response to temporary 
price gains achieved under an order. A major problem facing federal 
milk orders is uneven Class I utilization between markets, coupled 
with rapid conversion of manufacturing grade milk to Grade A and 
its association with federal order pools causing geographic disparities 
in farm milk prices. Although the present pricing and pooling system 
for milk has kept blend prices in reasonable alignment relative to 
transfer costs, significant modifications will be needed in the future. If 
new ways are not devised so that newly converted Grade A milk can 
share in fluid outlets in an orderly way, disorderly marketing condi- 
tions will be created all over the United States. We now have over fifty 
federal milk orders. No more than ten, and possibly as few as five, 
would possibly best serve the needs of the industry and the purposes 
of the public. 

Extent to Cover Processing Commodities. — Through the political 
strength of processors most processing fruits and vegetables are now 
exempt from market order coverage. When one use of a commodity is 
regulated and others are not, the nonregulated portion often interferes 
with the orderly marketing of the regulated portion. Futhermore the 
exemption results in an unequal availability of marketing options 
among groups of producers. Elimination of the exemption now writ- 
ten into the legislation would make it possible for all producers of all 
commodities to enjoy similar benefits and facilitate the orderly mar- 
keting of more products. 

More Funds for Promotion and Advertising — Producer "check-offs" 
for promotion and advertising are being made in approximately one- 
half of the federal and state milk orders, and one-fifth of the fruit and 
vegetable orders. These check-offs provide a mechanism for funding 
industry-wide generic advertising. The current market order legisla- 
tion limits authority to cover only selected commodities. Thus some 



69 



commodities, such as potatoes and eggs have recently obtained special 
legislation not connected with the orders to authorize industry wide 
check-offs. It would be more efficient if all commodities had the same 
enabling legislation to establish procedures for requesting and voting 
for advertising or promotion programs. 

Most advertising programs are not evaluated. It is difficult and can 
be costly. Some studies of milk advertising have indicated positive 
returns to producers above the cost of the program. Although a num- 
ber of fruit and vegetable generic advertising programs exist, little 
analysis of their effects has been accomplished. Without analysis farm- 
ers do not know whether their programs are beneficial or not. 

Promotion and advertising are recognized marketing tools that 
could be important options for agricultural producers, but, there is a 
critical need to determine both the applicability and benefits of these 
tools for basic agricultural products. However, where such programs 
are in operation, every effort should be made to make sure that the 
dollars collected are being properly and effectively spent so as to pro- 
vide farmers a proper return. 

tSupport of Electronic Exchange Systems.'^ — Marketing order legis- 
lation could be expanded to authorize and support the operation of 
exchange mechanisms. Funds could be collected under the order to pro- 
vide capital and operating funds for the establishment of centralized 
remote access market arrangements. Electronic remote access ex- 
changes increase market access, and speed the flow of price information 
thus increasing the price knowledge of farmers. Marketing orders 
could also be used to require that all or a portion of a commodity be 
traded across an electronic exchange. This would increase the exposure 
of sellers to buyers and buyers to sellers. 

Data Gathering and Reporting Market Transactions? — Because 
many commodities are marketed under contract arrangements for 
which prices are not reported it is increasingly difficult to determine 
market prices. Even when commodities are marketed through direct 
channels, prices derived from a relatively small number of sales at some 
central market are not representative nor do they necessarily reflect 
market conditions. A marketing order progam could require reporting 
of prices and related information on all transactions, whether con- 
tracted or open market sales. This information could be made public 
without disclosing source. This could provide a more efficient market- 
ing system, allow producers to make better informed price decisions, 
and provide reported prices which could be used in formula pricing. 

To Strengthen Bargaining Associations and Marketing Coopera- 
tives. — Many bargaining associations or marketing cooperatives now 
bear the cost of market regulation programs for the whole industry, 
including "free riders." Market order regulations can help spread the 
burden to all industry participants who benefit from the programs. For 
example, milk marketing cooperatives now perform a number of serv- 
ices which include delivery scheduling of desired quantities to individ- 
ual fluid milk processors, and to the market as a whole, and the bal- 
ancing of supplies to fluid and manufacturing outlets. Service charges 
incorporated into the minimum prices for milk paid by processors 
would remove some of the advantages now held by nonmembers or 



6 See Henderson, Schrader and Turner, "Centralized Remote-Access Markets." 

' See Padberg and Moulton, "Mandatory Public Reporting of Market Transactions." 



70 



smaller cooperatives who do not participate in the costs of programs 
from which they receive benefits. 

Over-order payments have come under increasing attack in recent 
years as evidence of the monopoly power of cooperatives. By incorpo- 
rating those parts of over-order payments which are charges for mar- 
keting services rendered into federal order prices, the economic and 
legal basis for them could be established. Marketing order legislation 
could be expanded to strengthen cooperatives and remove the "free 
rider" problem. 

To Include Production Allotment Programs. — Producer market 
allotment programs are authorized for three commodities: hops, 
Florida celery, and cranberries. Production allotment programs are not 
authorized for any commodity. Market allotment programs can influ- 
ence production through the allocation of markets. But farmers can 
still produce beyond the needs of the market. If supplies are to be 
truly tailored to market needs, independent of market price, produc- 
tion needs to be controlled or regulated. The authorization of produc- 
tion control or allotments would require major legislation changes in 
the order legislation. 

Expand Quality Upgrading. — Almost all fruit and vegetable mar- 
keting orders currently contain provisions for minimum grade, size, 
and/or maturity regulations for fresh marketings. Similar provisions 
could be established for other commodities. Quality regulation em- 
phasizes quality improvement to increase consumer demand for a com- 
modity. Sales of lower quality or smaller sizes, sold in competition with 
larger sizes or better quality, can lower the price for an entire crop. 

Specify TJmform Packaging. — A widely used provision of market 
order programs specifies uniform packing and container regulations. 
The major purpose of this regulation is to prevent deceptive practices 
involving shipping containers, and to encourage uniformity in pack- 
ages used for shipping commodities to market. This provides efficien- 
cies in handling at all levels of the marketing channel. This provision 
could improve efficiencies in food marketing even more if used or was 
authorized to be used for more commodities. 

Standards for packing within containers are provided in legislation. 
Such regulations specify how many of a certain kind or size of com- 
modity are to be packed in containers labeled in various manners. 
Pack regulation is especially important for commercial food service 
establishments desiring to control portions. Growers gain by consist- 
ently providing a fairly uniform pack so buyers get the size range de- 
sired and the expected number in each package. More emphasis on 
uniform packaging provisions in market orders would be beneficial. 

COXDITIOXS FOR ImPLEMEXTATIOX 

Marketing orders need to be tailored to particular situations. Pro- 
ducers desiring to use marketing orders in the ways considered above 
need to carefully analyze the potential impacts and desirable features 
for their economic situation. Obviously, not all of the above possibil- 
ities fit all commodities, and, for some commodities, marketing orders 
in the present form and in the proposed uses would not work. 

Marketing orders as traditionally used provide a mandatory ap- 
proach to coordinating the production-marketing sequence in those 



71 



commodities where conditions exist favorable to organizing and iden- 
tifying a set of mutually agreeable objectives. Implementation of suc- 
cessful marketing-order program.s require : (1) A well-defined produc- 
tion area which is geographically concentrated so that at least the 
majority of production falls under the same economic conditions, and 
so that production in one area will not be increased to offset gains 
achieved in another area; (2) different uses for the commodity and 
different price reactions to changes in quantities marketed, so that 
regulating quantity between uses may result in greater total revenue ; 
(3) progressive, competent leadership capable of coordinating produc- 
tion-marketing activities to meet the goals of the producers; (4) dif- 
ferent seasonal demands having different price-quantity responses 
which allow^ income increases through rate of flow regulation; and (5) 
funneling commodities through few outlets to provide easier control 
over the marketing system. 

Potential Impacts 

Hard questions must be dealt with in attempting to bolster farmer 
profits under marketing order programs : 

What are the potentials and limitations of the various programs 
for different commodities and economic situations ? 

What are the costs and benefits obtainable by farmers, handlers, 
and consumers? 

Each situation will require careful analysis by individuals thorough- 
ly familiar with the industry. 

With changes that have occurred in food costs, the economic-social- 
political climate in which United States agriculture now operates dif- 
fers markedly from a few years ago. Legislators, economists, regula- 
tory agencies, and the consuming public question the impact of farm 
programs and the distribution of gains among large and small pro- 
ducers; consumers have become better organized to challenge rising 
retail food costs; and public interests question the consistency, ade- 
quacy, and public costs of agricultural programs. It is in this setting 
that evaluation of the usefulness of expanding market order programs 
must be undertaken. Marketing order programs Avhich have as their 
goal substantial limitation of supply or substantial price enhancement 
for the benefit of farmers at the clear expense of consumers are not 
likely to be acceptable. 

The implications for farmers and their use of the programs discussed 
indicate emphasis should be put on programs to expand markets, do- 
mestic and foreign ; programs to increase efficiency in marketing ; and 
programs which permit farmers to capture profits in the marketing 
system or attain better prices from handlers through improved pi'oduc- 
tion marketing practices, without substantial enhancement of prices at 
retail. Most of the suggested uses of marketing orders described in this 
paper could fall into these categories. 

How TO AcHiE\^ Expanded Marketing-Order Programs 

The expansion of marketing order provisions into areas or to cover 
commodities for which the enabling legislation already exists requires 
an organized effort by a group of farmers or farm leaders to develop 

67-134—76 6 



72 



rules acceptable and advantageous to a sizeable majority of all pro- 
ducers that would be affected. Further legislation would be necessary 
to permit expanded use of the order provisions to cover commodities 
not currently authorized to use federal marketing orders. New or 
amended legislation would also be required to permit the marketing 
order approach to be used to support exchange mechanisms, expand 
promotion efforts, support specific data gathering and market informa- 
tion systems. 

SELECTED BIBLIOGRAPHY 

Armbruster, Walter J., "Federal Marketing Orders for Fruits and Vegetables." 
Proceedings of the Western Agricultural Economics Association 48th Annual 
Meeting, July, 1975. 

Graf, Truman F. and Jacobson, R. E., "Resolving Grade B Conversion and Low 
Class I Utilization Pricing and Pooling Problems." R 2503, Univ. of Wisconsin, 
June, 1973. 

Manchester, Alden C, "Milk Pricing." Agricultural Economic Report No. 315, 
Economic Research Service, U.S. Dept. of Agriculture, November, 1975. 

"Milk Pricing Policies and Procedures : Part I, The Milk Pricing Problem ; 
Part II, Alternative Pricing Procedures." Report of the Milk Pricing Advisory 
Committee, U.S. Dept. of Agriculture, March, 1972 and March, 1973. 

"Price Impacts of Federal Market Order Programs," Report of the Interagency 
Task Force, Special Report 12, Farmer Cooperative Service, U.S. Dept. of Agri- 
culture, January 7, 1975. 



MARKETING BOARDS 



(By Martin E. Abel^ and Michele M. Veeman^) 



Introduction 

The institutions known as "marketing boards" are one of many 
types of possible agricultural marketing policy instruments, and are 
long-established institutions in Australia, New Zealand, Canada, and 
the United Kingdom. In these and a large number of other countries, 
a legislative framework, experience, and familiarity with the wide 
number of uses of this type of policy instrument have gradually 
evolved. Marketing boards are not, however, the only instrument of 
agricultural marketing policy in these countries, nor are they a com- 
plete replacement for government controls or interventions. 

Marketing boards perform a number of functions which are carried 
out by farm and commodity organizations, bargaining groups, and by 
government agencies in the United States. Although the system of 
government under which they have evolved differs from ours, the 
problems they were designed to solve are common; thus this instru- 
ment of agricultural marketing policy holds some lessons for us. 

The definition of a marketing board tends to vary from country to 
country. In some countries, public or quasi-governmental bodies, which 
consist entirely or largely of government representatives, are con- 
sidered to be marketing boards, whereas in other coimtries these 
would be considered government agencies and the term "marketing 
board" reserved purely for producer-controlled bodies. Despite dif- 
ferences such as these, one common feature of all marketing boards is 
that they are compulsory bodies, set up under government legislation 
to perform specific marketing functions. In view of the time and 
space limitations, this paper will focus primarily on producer mar- 
keting boards. 

A producer marketing board may be described as a horizontal, pro- 
ducer-oriented organization established under government legislation 
which gives the board various legal powers of compulsion over pro- 
ducers and, in some instances, over manufacturers and handlers of 
primary or processed agricultural commodities, and which operate 
in the interest of agricultural producers. The degree of compul- 
sion over producers and others in the marketing chain, the type and 
extent of marketing functions undertaken by a board, and the extent 
of autonomy that a board has in carrying out its fimctions vary 
greatly between different commodities and different coimtries. This 
description of a producer marketing board as a "producer oriented" 

1 Professor, Department of Agricultural and Applied Economics and Director, Economic 
Development Center, University of Minnesota. 

2 Associate Professor, Department of Rural Economy, University of Alberta, Edmonton, 
Alberta, Canada. 

(73) 



74 



rather than as a "producer controlled"' organization encompasses 
bodies such as the Canadian Wheat Board which is, strictly speaking, 
a crown (or government) corporation which operates under the di- 
rection of government appointed commissioners, though with the 
guidance of an advisory committee of elected producer representatives. 
This description also includes as boards, bodies known as marketing 
commissions. A more restrictive definition of a producer marketing 
board as a "producer controlled" or "producer elected" body would 
exclude such boards, even though they function independent of gov- 
ernment financing and in the direct interests of producers. 

Establishment and Use of Marketing Boards 

Why Boards are Established. — ]Marketino- boards have generally 
tended to be established following periods of depressed and uncertain 
agricultural prices which in turn have been associated with producer 
discontent with the structure and functioning of the agricultural 
marketing system and suspicion of existing marketino' intermediaries. 
The earliest boards were established in Queensland, Australia, and in 
New Zealand in the early 1920's following producer discontent with 
the declining prices that followed World War I. These, as well as 
some later boards, were established after unsuccessful producer ef- 
forts to seek "market power" or "orderly marketing" through the es- 
tablishment and use of producer cooperatives. Depressed economic 
conditions in the 1930's also provided an impetus for more widespread 
pressure for agricultural marketing boards by producers. The ex- 
perience of relatively more favorable and stable agricultural prices 
in many British Commonwealth countries under government-to-gov- 
ernment export sales and controlled domestic marketing during World 
War II was also a factor leading many producers to accept or advo- 
cate continued use of more centralized marketing mechanisms during 
the late 1940's. 

In short, the primary objective of most agricultural marketing 
boards is to improve the price and income situation of agricultural 
producers. For many boards, this is the sole objective of their opera- 
tions ; however, some marketing boards have the secondary objectives 
of reducing variability in agricultural prices and, in some cases, of 
Droducing a degree of equity of market opportunities between dif- 
ferent producers. 

How Boards are Estahlished. — Marketing boards may be estab- 
lished for some commodities through specific legislation that provides 
for the establishment and specifies the membership, functions, and 
])owers of that particular board. Alternatively, in most countries, gen- 
eral enabling legislation has been passed which provides for proce- 
dures under which specific marketing boards may be established. In 
most instances, producers' approval is required and is determined by a 
vote or referendum before the establishment of a particular marketing 
plan or marketing board. The membership of most marketing boards 
is determined by ])i ()ducer vote, tliouo-h the legislative provisions under 
which a number of boards are established provides for government 
appointment of members rather than their direct determination by 
producer vote. Some boards' legislation provides for government ap- 
]:)ointment of certain members who are charged with the representa- 



75 



tive of public or consumer, rather than producer, interests. The legis- 
lative provisions applying to some boards (as for example in Aus- 
tralia and the United Kingdom) have in some instances provided for 
representation of manufacturer or handler interests. 

Major Functions of Marketing Boards. — There is great diversity in 
the number and type of functions performed by different marketing 
boards and, therefore, in the type and extent of the powers possessed 
by different boards. In this section of the paper, various functions 
which different boards perform are briefly surveyed. Most boards per- 
form some combination of the following functions though few, if any, 
boards perform all these functions. 

1. Collection and dissemination of market information is an ac- 
tivity performed by many marketing boards, generally in combina- 
tion with one or more other functions. 

2. Product promotion of existing forms of the product in existing 
markets or uses is another fairly common function of marketing 
boards. With some boards this function is more specialized and is 
extended further to development and promotion of new forms or uses 
of the product in new markets. 

3. Research and dissemination of information. A number of mar- 
keting boards conduct or sponsor research on production and market- 
ing problems that apply to particular commodities. Dissemination of 
such information to producers via board-sponsored journals or other 
publications is another activity carried out by many boards. Some 
boards provide a more formal technical advisory service for producers, 
nianufacturers or handlers on the adoption and maintenance of in- 
riovations with cost-reducing and efficiency-improving effects. 

4. The establishment and implementation of grading standards has 
been a function carried out by a number of boards. The encouragement 
of quality control through the establishment of grading systems has 
been an important function of some export control boards. 

5. Operation or supervision of selling facilities. In circumstances 
where market institutions or sales facilities have been considered in- 
adequate for effective price discovery, some marketing boards have 
been charged with the supervision or even the operation of the selling 
mechanism. An example is provided by various provincial hog mar- 
keting boards in Canada which, by operating teletype auction systems 
through which all slaughter hogs must be sold, attempt to maintain a 
degree of competition between purchasers.^ 

6. Collective bargaining and price negotiation. When it is deter- 
mined that there is a disadvantage to producers in facing a more con- 
centrated purchasing sector, a number of marketing boards negotiate 
the conditions of sale and prices for produce on behalf of all their 
producers. This is a common function of fruit and vegetable market- 
ing boards. In some instances, the bargaining power of such boards 
will be reinforced by the possibility of diverting produce to secondary 
markets or secondary uses or by powers to apply production or mar- 
keting quotas; however, these powers are not available to all negotiat- 
ing boards. A similar collective bargaining function is carried out by 
other boards with respect to producers' purchases of input supplies 



3 For a discussion of exchange mechanism see the "Centralized Remote-Access Markets" 
paper in this series. 



76 



or services. Examples here are provided by a number of export control 
boards which have, as one of their functions, the negotiation of terms 
of carriage and freight rates with shipping companies. 

7. Purchase, storage and sale of product. All boards are not em-, 
powered to trade in the commodity they are concerned with. Some 
boards have no trading powers at all, some are empowered to trade 
only in particular circumstances or special markets ; however, a num- 
ber of boards are required to act as the sole purchaser from producers 
and to sell on their behalf. Whether export or domestic trading 
boards, these bodies generally have a wide number of sub-functions 
and extensive powders. 

In pursuit of the general objective of reducing price fluctuations, 
some boards are empowered to operate buffer stock type operations 
(purchase, storage and sale programs designed to even out price fluc- 
tuations even though full trading activities may not be undertaken). 
The New Zealand Wool Marketing Corporation is a marketing board 
which pools sale proceeds (a different pool applying for every differ- 
ent grade) from sales of wool every season — a procedure which mini- 
mizes fluctuations in producers' prices within that season and equalizes 
market opportunities between different producers. This procedure is 
common with export trading boards. 

In pursuit of the general objective of increasing producer prices and 
returns, some trading boards are able to follow a trading and pricing 
• strategy or price discrimination between markets which have different 
demand characteristics. The Canadian egg marketing board influences 
the returns to egg producers through price discrimination between 
fresh and breaker egg markets. Dairy boards might influence returns 
through price discrimination between fluid milk and processing milk 
markets^ — an activity facilitated by the fluid milk quotas applied by all 
but one of the provincial milk marketing boards in Canada. 

In pursuit of the same objective, some board are empowered to limit 
marketings by applying production or marketing quotas. This activity 
recognizes the inelasticity of market demand that prevails for most 
agricultural products and is designed to increase total revenue to 
quota-holding producers. This type of board sometimes has the power 
to directly determine prices to be paid to producers by manufacturers 
or handlers — it may set prices by means of a formula or by means of 
some measure of cost of production. This is not a function performed 
by all boards. It is generally restricted to some domestic trading 
boards. 

The first five operations listed above are basically "facilitating 
functions" which may, to the extent that they lead to decreased costs' 
or decreased marketing margins, have beneficial effects for consumers 
as well as producers. More controversy is involved with functions in- 
volving price discrimj nation and production or marketing quotas. The 
exertion of market power by boards in this manner has been particu- 
larly subject to adverse comment by consumers in inflationary periods. 
The issues of distortion of efficiency in resource allocation, capitaliza- 
tion of quota benefits into quota values and consequent cost structure 
increases for farm firms, and restriction of entry to new producers 
into quota-controlled industries are side effects of these types of pro- 
grams, ^ whether carried out by marketing boards or by other 
institutions. 



77 



Types of Marketing Boards. — Promotion and advisory boards. Aii 
example of this type of board is the Xew Zealand Wool Board. This 
body largely consists of elected woolgrower representatives; an ap- 
pointed o;ovevnmGnt representative is also a member. This board's 
activities are partial fundinji of the International Wool Secretariat 
(an international body which conducts market promotion, technical 
research, and technicafadvisory services in major wool markets) ; local 
market promotion ; research and provision of technical advisory serv- 
ices to local manufacturers ; and provision of a shearer training serv- 
ice. The board has links with other institutions which include its 
collaboration with the Meat Board in conducting economic surveys of 
producers and its representation on the directorate of the Wool Mar- 
keting Corporation, a national body with trading powers. 

Regulatory and facilitating boards. Two somewhat different exam- 
ples of this type of board are ]:>rovided by tlie Australian 3Jeat Board 
and the Alberta Hog Producers' Marketing Board. The Australian 
^leat Board is a federal body (as distinct from those Australian 
boards established under state legislation). While members of the 
board are appointed, producer representatives predominate, though 
there is a government representative and two ir.eat exporter repre- 
sentatives. The board's activities are primarily funded by a levy on 
slaughtered livestock. The board conducts market development and 
promotion activities domestically and abroad. It has engaged in trad- 
ing activities (for example, with communist countries), but its major 
activities lie in regulation of. rather than conduct of. sales. The board 
controls the export of meat by issuing licenses to exporters and by 
approving Xorth American importers. Export control by license gives 
the board control over both the type of product exported as well as its 
destination. These controls are used in the board's market development 
strategy and have been used to ensure compliance with U.S. import 
quotas. The board has operated a market diversification program 
whereby exporters earned entitlements to export to the higher-priced 
U.S. market by selling a proportion of their product in other markets. 
Other major activities of the board include participation on the 
Australian Shippers' Council, which negotiates freight rates and re- 
lated issues, and its participation in developing a carcass classification 
system of grading. 

The Alberta Hog Producers* Marketing Board performs somewhat 
different functions. This board was established under legislation of 
the Province of Alberta in Canada. Board members are elected pro- 
ducers. The board is funded by a levy on slaughter hogs. Although tliis 
l)oard carries out promotional activities and has encouraged the devel- 
opment of export marketing of hogs under contract sales to Japan, 
its major function is to operate the mechanism of sale of all slaughter 
hogs produced in the province. This system was instituted because of 
a pre-board situation where a small number of hogs passing through 
terminal markets gave an insufficient indication of total supply and 
demand and yet served as the basis of price determination for the 
whole industry. The board operates a teletype auction system througli 
which all slaughter hogs must be sold. 

Export trading boards. Tlie Australian Wheat Board — a federal 
board — provides an example of this type of board. Most members of 
this board are elected producer representatives; there are also three 



78 



government appointees, one of whom rei)resents flour mill owners and 
one represents employees. The board is the statutory authority with 
the sole right to market wheat in Australia and Australian wheat and 
flour overseas. The board operates tlie government's wheat industry 
stabilization plan which involves administration of the government's 
guaranteed price for wheat for a specified quantity of exports and 
local sale of wlieat at prices determined on the basis of a measure of 
cost of production. When export prices exceed the guaranteed price, 
a portion of the excess is paid into a stabilization fund which is drawn 
on when export prices are less than the guaranteed price. The board 
controls the handling, storage, and shipment of wheat; it pools pro- 
ducer payments on an annual basis, and it engages in promotional 
activities and has entered into long-term sales agreements with a 
number of importing countries. 

Domestic trading board. A large number of examples of this type of 
board are available. Fluid milk and poultry boards are often of this 
type. These boards typically engage in promotion and sponsor re- 
search, but their major activity tends to be as the sole purchaser and 
seller of the commodity concerned. They may be empowered to set 
production or marketing quotas. Problems of quota use were briefly 
described in the preceding section. 

Implications or ^Iarketing Boards for the United States 

While marketing boards have not been an element in marketing U.S. 
agricultural products, they do represent a marketing option. We Avill 
discuss in some detail the role of only one type of marketing board, an 
export marketing board for grains, to illustrate the role such an in- 
stitution might pla3\ Similar considerations would be involved in the 
establishment and operation of export marketing boards for other 
products. As a simplification, the theoretical export marketing board 
would have sole control over U.S. grain exports only; domestic trade 
in grain would continue to be carried out by private firms and coopera- 
tives. Considerable interest has been expressed in the establishment of 
such an organization in recent years. 

A grain export marketing board could be either exclusively a gov- 
ernment agency or basically a producer organization. In the case of 
the former type of organization, a government agency would have re- 
sponsibility for export sales and producers or other groups would not 
have a direct input into the management of the board. In the case of 
producer boards, producers would play a major role in the oiDerations 
of the board. There may also be representation on the board of govern- 
ment, consumer, and possibly domestic food and feed grain marketing 
and processing interests. Our discussion will focus on the producer- 
type export marketing board. 

The primary responsibility of the board would be its exclusive au- 
thority for making all U.S. grain export sales. In addition, the board 
might be a vehicle for implementation of certain government price, in- 
come, and foreign food aid policies. The government might want the 
board to implement price support programs for grains when they are 
applicable, to carry reserve stocks, and to be the organization through 
which foreign food aid exports of grains are handled. 

It would be important for the board to distinguish in its operations 
those functions that it performs for producer members, such as com- 



79 



mercial exports sales, and those that it performs for government, such 
as price support activities and maintenance and management of re- 
serve stocks. Such a distinction among different functions would per- 
mit proper evaluation of the board's operations from the standpoint of 
l^roducer and public interests. Better coordination between the board's 
and government's activities could result in better planning of export 
sales. Also, information concerning sales could be made available to 
the domestic market sooner than under the present system thereby re- 
ducing the opportunity for a few private firms to reap profits at the 
expense of producers and consumers under certain market conditions. 

Second, the domestic market for grains would continue to operate 
basically as it now does with ]:)rivate tirms and cooperatives having the 
responsibility for the marketing and processing of grains. Futures 
markets for grain would continue to operate servmg both domestic in- 
terests and those of the board. The performance of futures markets 
wdth respect to their role of determining expected demand, supply, and 
price conditions could be improved if a grain export marketiiig board 
were to provide to the market more accurate and more timely informa- 
tion about export sales than occurs under the present system. 

Third, the board could utilize cooperatives and private firms in as- 
sembling and shipping export grain. It Avould not have to duplicate 
existing capabilities for performing these functions. Thus, private and 
cooperative interests would not be completely excluded from the grain 
export busino; s, but only from performing the sales functions. Close 
cooperation between cooperatives and the board might be an indirect 
way for cooperatives to become more active in the grain export 
business. 

The consequences of a grains export marketing board are numerous. 
The board would replace private firms and cooperatives in their role 
of making export sales. In doing so it would have to develop a world- 
wide market information and sales network to replace the existing pri- 
vate one. This would represent a substantial cost to the marketing 
board and mi^fht take several years to develop a complete and well- 
trained staff. The potential benefits would have to offset these costs for 
it to be feasible. 

Fourth, producers could be required to make compulsory deliveries 
to the board in order for it to meet export sales commitments. Most 
likely, the size of grain delivery commitments to the board would be 
related to a level of production base established for each firm. Compul- 
sory deliveries to the board might have to take precedent over sales in 
the domestic market to ensure that the board had adequate supplies 
of different types and grades of grain to meet export commitments. 
The board n:iight also buy grain in the open domestic market, but 
may not want to rely primarily on this source of export grain because of 
uncertainties about producers' sales behavior and, therefore, market 
price conditions. 

Fifth, and closely related to the possibility of compulsory deliv- 
eries, is the requirement that grain export marketing board keep con- 
tinuously appraised of the domestic supply of different types and 
grades of grain and their domestic requirements. The board's export 
sales should be as consistent as possible with both producer and con- 
sumer grain price objectives in the United States as well as overall 
producer returns. The board should conduct its sales program in a way 
that does not unduly disrupt domestic markets. 

67-134—76 7 



80 



Sixth, the grain export marketing board could pay farmers an aver- 
age price for each quality of grade of grain for each of the marketing 
seasons. Producers could receive a partial payment for their grain at 
the time it was delivered to the board. Subsequent payments v/ould be 
made to producers after the crop had been marketed and the board's 
receipts and expenses known. With respect to exports, this system of 
"price pooling" eliminates seasonal fluctuations in prices, but it also 
delays the time when farmers know the final price they receive for 
their products. 

Finally, as with any form of public monopoly which a marketing 
board is, one has to be concerned with accountability to both producers 
and consumers which the monopoly serves. Producers have to be con- 
cerned with whether or not the board is operating efficiently and in 
their interests. Consumers would be concerned with whether or not 
the board exercises "excessive*' economic power, i.e., whether or not 
the marketing board is maintaining prices aboA^e either free market 
levels or those that would prevail under current patterns of govern- 
mental intervention. Representation of various interest groups on the 
board, together w^ith close coordination of the board's activities with 
government agencies responsible for domestic and foreign policies rele- 
vant to grains, could ensure "responsible'' behavior of the board with 
respect to both producer and public interests. 

Establishment and Successful Operation 

The establishment of a grain export marketing board in the United 
States would require national legislation. This legislation would give 
the board exclusive authority to handle grain exports. The legislation 
would also determine representation on the board and provide basic 
direction as to what the board can or cannot do. 

Because a grain export marketing board would represent a sig- 
nificant departure from current practices. Congress would have to be 
convinced of several things before it is likely to give serious considera- 
tion to passing legislation to establish a board : one is widespread pro- 
ducer support for the new institution, another is that the board could 
adequately refle<it producer, consumer, and the nation's domestic and 
foreign economic interests and would better serve these interests than 
the present export system. 

For the board to be a viable organization it would have to be ac- 
cepted by producers and the public alike. This means that producers 
would have to accept such basic principles of operation as compulsory 
delivery of grain to the board (or, at the least, that the board be the 
compulsory purchaser and seller for the export market) and price 
pooling. It also means that the public would view the operations of the 
board as consistent with broadly accepted domestic and foreign eco- 
nomic policy objectives. Mechanisms would have to be developed to 
ensure accountability of the board's operations to producers and the 
public. This will undoubtedly require representation of different 
groups on the board and that a considerable amount of the grain ex- 
port marketing board's activities be reported to the public. 



81 



SELECTED BIBLOGRAPHY 

Campbell, Keith O.. "Agricultural Marketing and Prices." Melvourne, Cheshire 
Publishing Pty. Ltd., 1973, Chapters 8, 9, 10. 

Department of Agricultural Economics and Farm Management, Faculty of 
Agriculture, "Market Regulation in Canadian Agriculture." (Papers presented 
at the Marketing Board Seminar, January, 1972). Occasional Series No. 3. 
Winnipeg, The University of Manitoba, May, 1972. 

Hiscocks, G. A. and Bennett, T. A., "Marketing Boards and Pricing in Canada." 
Canadian Farm Economics, Vol. 9, No. 3, June, 1974, pp. 15-22. 

Morley, J. A. E., "Marketing Boards," in T. K. Warley, ed., "Agricultural Pro- 
ducers and Their Markets." New York, Augustus M. Kelley. 1967, pp. 341-351. 

National Farm Products Marketing Council, "Proceedings of the Federal- 
Provincial Marketing Seminar." (Held at Banff School of Fine Arts, Banff,. 
Alberta, January, 1974). Ottawa, National Farm Products Marketing Council, 
n.d. 

Walker, Hugh V., "Bargaining Through Marketing Boards: The Canadian Ex- 
perience." Bargaining in Agriculture: Potentials and Pitfalls in Collective A'-tion. 
North Central Regional Extension Publication 30. University of Missouri Ex- 
tension Division, June, 1971, pp. 40-44. 



FINE TUNING THE PRESENT SYSTEM 

(By Ronald D. Knutson \ Dale C. Dalil \ Jack Armstrong 



It is frequently suggested that major changes in legislation or struc- 
tural changes in agriculture , are not necessary to improve the compe- 
tition in agricultural markets. All that is required is that we do a better 
job of administering and enforcing existing laws and thereby facilitate 
greater competition and equity in producer markets — whether on the 
input or output side. 

What Is a Fine Tuning Strategy? 

Fine tuning implies a multitude of government-facilitating and 
regulatory strategies that can be pursued through existing legislation 
to improve the position of farmers in the marketplace and an emphasis 
on government, administrative and/or producer action to make the 
markets in which farmers deal more competitive. In essence it is a 
"'ring and valve job" for government programs to assist farmers in 
marketing their products. 

In our concept of fine tuning the farmer faces three major problems : 

1. Insufficient competition in the markets where he buys his inputs 
or sells his products. The root of this problem lies in the relatively 
high levels of concentration and market power of sellers of inputs and 
buyers of farm products. 

2. Producers are in an inferior negotiating position. This is the result 
of the concentration and market power facing farmers and the fact 
that farmers have not exercised market initiatives to gain a relative 
balance of market power. 

3. Producer access to markets is becoming increasingly restricted. 
Higher levels of concentration and more fully-integrated systems of 
production and marketing are the primary contributors to problems 
of producer market access. 

This paper explores these problems and suggests they may be rem- 
edied by reducing the effects of monopoly in agriculture ; by increas- 
ing the market power of producers to place them in a balanced nego- 
tiating position with that of input supplier and/or food processors 
and retailers; and by improving the quantity and quality of informa- 
tion at the producers' disposal to make marketing decisions. To a sig- 
nificant extent this can be done within the present legislative author- 
ity — if we have the will. It is recognized that to be publicly acceptable, 
the results of the suggestions made here must be in the interest of con- 
sumers as well as producers. 



1 Professor, Department of Agricultural Economics, Texas A&M Unlver=;jty 

2 Professor, Department of Agricultural and Applied Economics, University of Minnesota. 
•^Assistant Administrator, Farmer Cooperative Service, U.S. Department 'of Acrrlculture 
a-shington, D.C. ' 

(82) 



83 



Fine Tuning To Keduce Effects of Monopoly in Agriculture 

Many of the markets from which farmers purchase inputs and into 
which they sell their production are controlled by a relatively small 
number of firms. Many are localized thus allowing the farmer few^ 
market alternatives. The problem is compounded by large input sup- 
pliers or marketing firms dealing in many different local and regional 
markets. These firms are frequently in a postion to affect the local, 
regional, as well as national level of input and farm-product prices. 
Increasingly, powers of these firms are magnified as they integrate 
into production by either contract or ownership. 

Existing regulations, properly enforced and administered, provide 
numerous opportunities to remedy problems of monopoly in agricul- 
ture. These opportunities fall in three major categories : improved en- 
forcement of regulations currently administered by the Secretary of 
Agriculture; clarification and modification of our antitrust policy 
with respect to the food industry; and the removal of government- 
authorized or imposed monopolies. 

Agricultural market regulations currently enforced by the Depart- 
ment of Agriculture contain many provisions designed to foster com- 
j)etition. The full competition-enhancing effect of these regulations is 
not being realized. Provisions relating to fostering competition and 
preventing monopoly are sometimes ignored completely. 

In other cases, enforcement activities of the department are more 
cosmetic than effective. Rather than being used as a monitoring device 
or determinant, USDA market regulatory agencies react only after a 
complaint of abuse. Usually the producer is in no position to com- 
plain, either because he fears retaliation or because the effect is of 
such a general nature that he cannot prove a cause and effect relation- 
ship. 

'Why is this the case ? Too often the Department of Agriculture has 
viewed agricultural input suppliers, marketing firms, processors, and 
retailers as part of its constituency. This advocacy role conflicts with 
its regulatory role. The result is that regulation suffers at the expense 
of advocacy and conflicting clientele interests. 

The following specific suggestions are made to fine tune regulations 
of the Department of Agriculture : 

1. In order to protect competition in the food industry an asrency 
sliould be established with expertise to monitor input, farm, and food 
prices for evidence of abuses to producer and public interests. Sucli an 
agency should devote particular attention to evidence of undue price 
enhancement by cooperatives in violation of the Capper- Volstead Act, 
and to evidence of price rigidities which prevent chan.q-es in f ami -level 
prices from being reflected in wholesale and/or retail prices. ^"\niere 
evidence of legal abuse is found it should be referred to relevant law 
enforcement officials in the Department of Justice or tlie Fpderal 
Trade Commission. In other cases, simply focusing public attention on 
the situation mav be sufficient to bring about a more rosnonsive svsfem. 

2. The Agi'icultnral ^Marketing Agreement Act of 1037, as amended, 
specifically charsres the Secretarv of Agriculture with protecting the 
public interest in marketinfif order and agreement provisions and /or 
decisions. Seldom has any Secretary of Agriculture taken overt action 



84 



to effectuate this charge. For example, under fruit and vegetable 
marketing orders the decisions of the administrative committee — made 
up of producer and shipper interests — with relatively few exceptions 
Jiave had the force of law. Under milk marketing orders the authority 
given the Secretary to establish rules of competitive conduct have 
never been utilized. The public interest responsibilities under these 
laws could be more eft'ectively enforced. 

3. The Packers and Stockyards Act has been the main device for 
regulating competition in the meat packing industry. From time to 
time serious questions have been raised concerning the extent to which 
this law and its enforcement priorities is being enforced. Dramatic 
structural changes of horizontal, vertical, and conglomerate dimen- 
sions have occurred: the basis for pricing in the meat industry has 
become progressively shallow; contracting is becoming increasingly 
prevalent; rate-making still continues an important function of the 
act despite a larger number of alternate outlets available to the pro- 
ducer. Little has been done to address the issues raised by these 
changes. The reason, it is frequently suggested, is that questions of 
jurisdiction exist between the USD A, the Department of Justice, and 
the FTC. ^Vhile this is true, nothing is accomplished as long as each 
agency uses the same excuse for not acting on problems of critical im- 
portance to producer and public interests. 

4. Other Department of Agriculture regulations require initiative to 
protect competition. Certain regulations are not enforced unless a pro- 
ducer is willing to divulge his identity and risk substantial economic 
retaliation and injurj^ Under the Perishable Agriculture Commodi- 
ties Act and the Agricultural Fair Practices Act the department has 
been unwilling to allow a producer association to render a complaint 
on behalf of its producers unless the affected producers are specifi- 
cally identified. Greater initiative should be exercised in such cases 
to protect producer interests. Where the department serves a licensing 
function, a systematic method for monitoring the extent to which the 
provisions of the law are being carried out should be an integral part 
of the program. If clarification of legislation is required in order 
to ]iroceed, the department should be an active advocate of such 
clarification. 

The main responsibility for enforcement of these regulations ciiv- 
Tently lies in the Department of Agriculture. This can be justified 
'On tlie grounds that special expertise exists within the department to 
understand, analyze, and evaluate agricultural programs. Resolution 
of these problems requires more vigorous enforcement, and coopera- 
tion with other agencies of government such as the FTC and the De- 
partment of Justice. 

If the USDA cannot or does not effectively enforce the laws over 
which it has responsibility, consideration should be given to either 
the establishment of a new regulatory agency outside the department — 
as was done in the case of the Commodities Futures Trading Com- 
mission — or to transfer enforcement responsibility to the FTC or 
the Department of Justice. It seems apparent, however, that the De- 
partment of Agriculture, with its specialized expertise, should be able 
to administer these laws better than any other government agency. 



85 



Antitrust regulations applied to food industries are currently 
enforced in stringent — if not doctrinaire — fashion cases of mergers 
or acquisitions of firms at the same market level. Such enforcement 
has not stemmed the trend toward increased concentration, accom- 
plished by internal firm expansion. At the same time, it has tended 
to force large growth-oriented firms to either expand vertically — 
backward or forward — or conglomerate into new product lines. Both 
types of growth have the potential not only to distort the structure 
oi agriculture but also to lead to less competition thus placing the 
producer in an even more disadvantaged position. In the long run, 
uncontrolled vertical integration has the potential for completely 
removing the independent farmer as a viable force in agriculture. 

Vertical integration, whether by contract or ownership, lias many 
desirable coordinative and efficiency-enhancing attributes; therefore, 
a doctrinaire approach to vertical and conglomerate growth could 
be as harmful as a doctrinaire approach to horizontal growth. Despite 
this fact, several states have taken steps to prohibit corporate owner- 
ship of agricultural land. 

On the other hand, there has been no substantial federal action to 
curb vertical integration by contract or ownership. It seems doubtful 
any precise policy can be developed and applied equally to all indus- 
try situations. An aggressive case-by-case approach aimed at develop- 
ing a body of case laws to cover vertical and conglomerate integration 
in food industries would appear to be a desirable strateg^^ Such an 
aproach should be pursued in the early stages of development on a 
case-by-case and industry-by-industry basis. 

Government authorized, regulated, or enforced monopolies are par- 
ticularly prevalent in the food industry or in closely allied industries 
such as transportation. To an important extent, the problem is one 
of overregulation and duplication of regulatory authority : Federal 
marketing orders duplicate state marketing orders in milk, fruits, and 
vegetables; federal licensing laws are piled atop state and local licens- 
ing laws; sanitation labeling and inspection requirements duplicate 
and sometimes conflict with one another. Frequently, state laws are 
applied in a discriminator}^ manner to foreclose an out-of-state product 
from a market. 

The Department of Agriculture, the Department of Health, Edu- 
cation and Welfare, the Department of Justice, and the Federal Trade 
Commission should move vigorously against regulations that impede 
competition, sanction monopoly, or discriminate against producers 
and firms in other states or localities. In many cases these laws can 
be struck down on the basis of federal supremacy. An ad hoc com- 
mission may be needed to identify priority areas of abuse. Educational 
programs to alert constimers to the negative impact of such laws 
should be encouraged and developed. 

In the end, the key to eifective regulation lies in constant adjust- 
ment to changing conditions for tlie common good. Bad regulations 
come into being not by design but by default : regulatory officials fail 
to change with the times. Such default creates economic distortions 
and incentives contrary to the public interest. This comment applies 
to the regtilation of railroads as well as to milk, meat, and grain. 



86 



Complete de-re^^nlation is not the answer. The answer instead lies in 
recoo:nizing the direction in which we want to change and by progres- 
sively moving in that direction with a balanced package of regulatory 
change and assistance. 

Fine Tuning To Improve the Producers' Market Position 

New initiatives are needed by producers to develop a more promi- 
nent role as competitors and, in limited instances, to become more 
effective bargaining agents on their own behalf. In the past, much of 
this initiative has come from cooperatives, but the cooperative com- 
munity is not changing as rapidly as required to meet the needs of 
modern agriculture. The cooperative movement needs to be revital- 
ized — to become a major force in grain export marketing, to effectively 
represent producer interests in livestock marketing, and to reassert its 
competitive leadership in areas where it has traditionally had strength. 

New producer initiatives should not be aimed exclusively toward the 
advancement of cooperative involvement in markets. Instead, they 
should address a wide range of organizational forms, including indi- 
vidual producer integration, the formation of producer corporations, 
partnerships, and limited partnerships. To this end a separate agency, 
the Farmers Marketing Service, should be established within the De- 
partment of Agriculture. 

The Farmers Marketing Service would have three primary roles: 

1. To conduct applied research on new opportunities for producer 
initiatives in marketing. Suggested areas for initial exploration could 
include the formation of producer-owner export cooperatives to repre- 
sent producer interests in the highly-concentrated and corporate- 
dominated export market, the reestablishment of producer initiative 
in the livestock industry, and the expansion of direct farmer-to- 
consumer marketing. 

2. To educate and provide assistance to producers in cooperation 
with federal and state extension services so they may take advantage 
of these marketing opportunities. 

3. To marshal within the Department of Agriculture and other 
government agencies the necessary financial and marketing assistance 
to get producer initiatives on a firm economic base. If a substantial 
producer export cooperative were established, the Foreign Agricul- 
tural Service should look on such an organization as a significant new 
client for its market development and sales referral efforts. Purchas- 
ing activities by state-trading nations could be channeled directly to 
the producer and thereby expensive middlemen functions could be 
bypassed, coordination could be improved, and profits could be chan- 
neled to the producer level. 

There are times when government sanction of bargaining would ap- 
pear to be a necessary producer strategy for fine tuning producer inter- 
ests. Such are the cases of processed fruits and vegetables and poultry 
produced imder contract with an integrator where the grower does 
not hold title to the produce he produces. In many instances the pro- 
ducer finds himself at the mercy of the processor, financially as well as 
for a market. In cases where integrator control is essential for coordi- 
nation and efficient production of a uniform product, government sup- 
port for bargaining activities — including education, research, and even 



87 



legislation — would appear essential. If this support is not given, these 
piece-wage laborers could be organized by labor unions — an option 
considered contrary to the public interest since it would establish 
monopolizing control over production resources. 

Fine Tuning To Improve Market Information and Pricing 

Intelligent and informed producer decisions foster more competition 
as well as efficiency in the allocation of resources. At a time when mar- 
ket conditions change on an hourly basis, up-to-date information for 
decisionmaking is even more critical. While the United States has one 
of the most advanced market information systems in the world, there 
are still major gaps in it. Too, the producer is frequently not in the 
best position to access or interpret market information. The following 
suggestions are designed to at least partially remedy these problems : ^ 

1. Purchased inputs constitute an ever-increasing portion of produc- 
tion expenses ; yet our information system is nearly devoid of data on 
purchased input prices. At any single point in time, there is greater 
variation in input prices than product prices. Lack of information is at 
least partially responsible for this wide variation. Public price report- 
ing of purchased inputs such as fuel, formula feeds, fertilizer, chemi- 
cals, and farm machinery is recommended. 

2. With contract and ownership integration becoming increasingly 
prevalent, terms of trade other than price become more and more criti- 
cal to the producer contemplating entry into such arrangements. The 
reporting of contract terms on a timely basis is virtually nonexistent. 
This leaves the growers of broilers, turkeys, and processed vegetables 
with no objective basis for evaluation and comparison. Two steps are 
suggested as remedies. First, it is recommended that the USDA begin 
reporting the terms of contracts prior to and during sign-up periods, 
and second, it is recommended that a standard contract be prepared by 
the USDA representing prevailing industry practices and producer 
interests. Such a contract would serve as a standard for producer con- 
tract comparison. 

3. Improved price reporting is at least partially dependent on the im- 
provement of grade standards used in product descriptions and identi- 
fication. Major revision is needed for many grade standards to reflect 
producers consumer and /or industry quality attributes and values 
in the form of appropriate price levels and differentials. A few exam- 
ples needing immediate attention can be cited : grain grades should be 
modified to better reflect differences in protein content and product 
end-uses; consumer grades and standards for pork should be estab- 
lished; and fresh fruit and vegetable grades should reflect maturity 
and internal nutritional and eating quality rather than external ap- 
pearance only. 

4. Since the 1972 Russian wheat sale, significant advances have been 
made in reporting international transactions; yet the fact remains 
that sales are not reported until after transactions are consumated. 
During the period of negotiations, the opportunity exists for a major 
tuyer to act with more knowledge of pending changes in market de- 
mand and price conditions than other buyers or sellers. The ability to 



* other papers in this series provide more detail on some of these suggestion"- 



88 



thus use information to one's own adv^antage might enable him to reap 
su})stantial benefit. To at least partially remedy the above problems, 
three suggestions are made : 

(a) In order that news of a substantial sale may be immediately 
reflected in the market, it is suggested that the daily limits on the 
movements of prices on futures markets be removed. 

(h) The increasing prevalence of state traders in international 
markets puts a producer in a much more vulnerable position. Ac- 
cordingly, it is recommended that before a state-trading nation or 
a representative of a state-trading nation approaches a company 
for ITnited States grain it be required to report its intentions to 
the Government, including an estimate of its purchases in the cur- 
rent transaction as Avell as for the remainder of the crop year. Such 
intentions would then automatically be made public by the 
Government. 

(c) Much of the international intelligence on crop and potential 
demand conditions is transmitted to the United States by the agri- 
cultural attaches stationed in coimtries with which we have diplo- 
matic relations. These reports have been a fairly accurate indicator 
of pending developments in international tr'ade of significance to 
the United States producer. With their already-existing world- 
wide intelligence networks, it is apparent that major grain ex- 
porters have better access to such information than do producers. 
Accordingly, it is recommended that all agricultural attache 
reports on crop and demand conditions be made public at the time 
they are received. 
5. Currently, local market prices are not available to producers in 
most areas of the country. As local market areas expand through im- 
proved transportation, it becomes increasingly difficult for a producer 
to be informed of price differences within his market area.; therefore, 
improved price reporting at the producer level is needed, including the 
reporting of contract terms at the local level. The importance of televi- 
sion as a medium for transmitting market information has not been 
realized. Expanded use of separate public or cable television channels 
for market news in rural areas needs to be explored. The direct and 
continuous broadcast of agricultural news service teletypes would be 
possible. This would provide up-to-date information on prices as well 
as major market and news developments. 

^ 6. Market information is useless unless it is integrated into the de- 
cision framework ; therefore the continued and upgraded support for 
activities to improve the economic aspects of producer decisions is 
essential. 

How To Achieve Fine Tuning 

The suggestions made in this paper do not require legislation; they 
require only administrative action. Some exceptions may exist in cases 
where clarification of existing legislation is needed or in instances 
where the Secretary of Agriculture or other responsible agency head 
cannot, should not, or does not enforce a le^rislated responsibility. In 
the latter case it would be necessary to seek legislation to transfer that 
responsibility to another agency. 

To get one or more of the aboA^e actions implemented will require 
producer initiative. Some will require more initiative than others be- 



89 



cause of variation in the level of bureaucratic resistance to change or 
pressure placed on an administrator by those adversely affected by the 
action. In some instances, pressure on elected as well as appointed offi- 
cials will be required not only to get the attention of responsible ad- 
ministrative officials but also to get the appropriations needed to carry 
Qut expanded programs^ 

Effects of Fine Tuning 

The objectives of the fine tuning suggestions made herein are to 
improve market access, to enhance competition for farmers' products, 
and to bring about a better balance of the farmer's position in the 
market without injuring consumers. The magnitude of the effect is 
dependent on Avhich suggestions are implemented and to what degree. 

Producers would be in a more favorable market position if the sys- 
tem is fine tuned. ^Vhile not assured of a substantially higher price, 
they would be assured of a more competitive price and access to all 
alternative markets. Also, they would be less vulnerable to corporate 
takeover. With more information available, farmers would have a bet- 
ter basis to make decisions. Production would be more oriented to the 
needs of the market, although not as much as in the case of full 
integration. 

The consumer's position in a finely tuned market place would not 
substantially change. A more competitive producer price passed 
through to the consumer means higher consumer prices. On the other 
hand, reflecting price advances and declines at the producer level 
through to the retail level likely means somewhat lower prices. Con- 
sumers would be protected against exploitive market abuses of pro- 
ducers and agribusinesses. Improvements in grading would provide 
improved consumer decisions and production of products in the con- 
sumer's interest. 

Agribusiness is the most probable loser if fine tuning is imple- 
mented, but its losses can easily be exaggerated. With increased de- 
pendence on exports, maintaining our competitive position in inter- 
national markets is dependent on maintaining an efficient domestic 
production-marketing system. Elements of monopoly and imperfect 
knowledge foster staonation and inefficiency. They impair our ability 
to compete in a world market. Despite this word of caution, the fine 
tuning suggestions do place producers on a more even plane with agri- 
business ; thus agribusiness is a relative loser. 

Rural communities would benefit from the suggested fine tuning 
approach as the thrust is toward decentralization. Tlie results would 
be more farms and more jobs in the rural areas and thus a largei- tax 
base. More rural communities Avould have a l^asis for sustained growth. 

The general public would balance on the benefits of fine tuning. The 
costs would be somewhat higher levels of government activity and in- 
volvement while long term benefits would be greater competition and 
less centralization of power in the hands of a few. 

Limits of Fine Tuning 

Certain problems cannot be solved by the fine tuning strategy and 
therefore would require legislative action if they are to be solved by 



90 



government. Included are the l)asic problems of uncertainty, price 
instability, and cycles, such as the hog and cattle cycles. However solv- 
ing such problems would require considerably higher degrees of gov- 
ernment intervention than presently exist. The other papers in this 
series provide other suggestions most of which go beyond the fine tun- 
ing approach herein. Fine tuning is a process that is continuous, a 
process that corrects or causes more inefficiencies or inquities, depend- 
ing on the skill of those involved. To facilitate fine tuning requires 
that information be made public and that the public administrators 
and representatives keep the public interest in mind. 



INDUSTRIAL RESTRUCTURING: A POLICY FOR 
INDUSTRIAL COMPETITION 



(By Leon Garoyan^ and H. M. Harris, Jr.") 



Introduction 

There is e^ddence that high levels of industry concentration are 
associated with excessive price inflation experienced in recent years, 
and price inflexibility during j)eriods of lower demand. For example, 
the price of automobiles and pickups continues to escalate in 1974-75 
despite lower consumer demand. The prices of items farmers buy 
continue to rise despite weakened demand at times and marketing mar- 
gins and retail prices on food are relatively constant despite sub- 
stantial shifts in supplies and raw product prices. Prices are observed 
to rise faster in more concentrated industries, while rising less in 
more competitive industries. The reason industry concentration is im- 
portant here is that farmers are affected. The results of high con- 
centration or lack of competition affects their incomes directly, regard- 
less of where the monopoly power exists. 

Clearly there is nothing inherently wrong with the free enterprise 
system upon which the United States social, political, and economic 
structures are based. To the contrary, problems occur when major 
imperfections are allowed to persist which prevent the free forces of 
competition from functioning. While we consider mainly the issue 
of size and concentration of unreasonable market power in agricul- 
ture in this paper, it is not always possible to separate agriculture 
from the rest of industry. 

The Cuerext Status of Antitrust Legislation, Enforcement, 
AND Concentration 

Major Antitrust Laws. — The United States policy on competition 
is contained in three acts that apply generally, and one that is sperific 
to agriculture. In addition, a number of exemptions are provided. The 
Capper- Vol stead Act is one such exemption and will be discussed 
later in the paper. A brief summary of relevant antitrust statutes is 
given below. 

1. The Sharman Act of 1890 declares illegal : Contracts, combina- 
tions, or conspiracies in restraint of trade; and monopolizing, at- 
tempting to monopolize, combining or conspiring to monopolize any 
part of the interstate trade or commerce. Both civil and criminal 
cases may be filed. 

2. The Federal Trade Commission Act of 1938 declares unfair 
methods of competition and unfair or deceptive acts or practices in. 
commerce to be unlawful. 



1 Professor. Department of AjrrifnlturRl Economics. University of Cnlifornia, Davis. 

2 Professor, Department of Agricultural Economics, Clemson University. 



(91) 



92 



3. The Clayton Act as amended by the Robinson-Patman Act of 
1936 prohibits price discrimination where the effects of such dis- 
crimination may be to substantially lessen competition or tend to 
create a monopoly. The act also prohibits exclusive-dealing leases, con- 
tracts, rebates or discounts, and acquisition of stock or assets by one 
corporation or another where the effect may be to substantially lessen 
competition or tend to create a monopoly. 

4. The Packers and Stockyards Act of 1921 (amended in 1958) 
provides for regulation of interstate and foreign commerce in live- 
-stock products, dairy products, and poultry products. The act de- 
clares monopolies, trade restraints, price manipulation or control, 
and other unfair trade practices in such industries to be illegal. 

Existing antitrust laws have not been effective in limiting growth 
of large conglomerates that wield great political and economic power, 
nor does their existence imply vigorous enforcement to stem non- 
competitive practices. 

Enforcement Activity hy Antitrust Agencies. — One way to measure 
the vigor of antitrust activity over time is from statistics on the 
number of monopoly charges filed and their disposition.^ This pro- 
vides a measure of activity, but says nothing of the quality of the cases 
filed and their economic significant. Justice Department activity in 
the first decade after the Sherman Act consisted of 18 charges filed, 
of which ten were lost. In the period from 1890-1949, a total of 1.005 
charges were filed, of which 295 or 29 percent were lost. The Federal 
Trade Commission, from their beginning in 1917 through fiscal year 
1949, filed 1,121 complaints, of which 386 or 34 percent were dismissed. 
In the period 1950-66, the Justice Department issued 914 complaints, 
and the FTC, 1,31T, for a total of 2,231. Not all of these complaints 
were taken to court. 

An important part of antitrust laws is the right for private anti- 
trust cases. Evidence shows that for the 16-year-period 1951-66, gov- 
ernment agencies took to the courts 579 civil and 329 criminal com- 
plaints, for a total of 908 cases. Meanwhile, a total of 6.537 private 
cases had been filed by firms.^ The number of court actions is small in 
view of the size of the United States economy. 

Coywentration in United States Industry, — The plienomenal growth 
in size of corporations over time is reflected by data in Table 1. The 
nnmber of firms with assets of over $1 billion increased from one in 
1909. to 115 in 1972, and in 1972 these accounted for 52 percent of all 
corporate assets in the United States. Firms with assets over $250 
million increased from 3 to 350 during this same period and accounted 
for 70 percent of total corporate assets. While inflation has certainly 
been a factor in this growth, it is not the prime factor. For example, 
adjusting 1909 assets of corporations in terms of 1972 prices would 
increase bv only two the number of corporations with assets in excess 
of $1 billion,^ ?»[uch of the GTowth reflects conr'-lomerate irrowth. 

These fi,*rures relate to absolute o-rowth of firms. IMueller provides 
rlnta that indicate concentration ratios for 168 United States industries 
hnve increased by four percent from 1917 to 1970. However, for 98 



"rnnsrross rnd th(^ Monopoly Problpm," Selpct Commitfpp on Small Business, nou<?e 
• f R'^nrpspntntivos, S9thh Conerrpss, 2nd Session. lf)fiR. tables pnJTPs 5.~3-o5S. 

* "Congress and the Monopoly Problem." op. cit.. tables pajres 5o.'^-5."),S. 

■'^ AV. F. ^'^nellor. 'Tiirrent Polipy Issues in Antitrust." unpublished naner nresen*-od at 
'Toufprenee on Industrial Organization : Policy Planning in Antitrust," Southern Illinois 
University, April 1973, 



93 



producer ffoods industries — producing })roducts used as inputs for 
further manufacture — concentration actually dropped during this 
i:)eriod. (See Table 2.) But for 70 industries producing consumer goods, 
concentration increased by 5.8 percentage points. Further, the greater 
tlie degree of product differentiation within these industries, the larger 
the rate of increase in concentration. For example, industries with low 
product differentiation experienced a 0.4 percentage point increase. 

Concentration in agricultural industries is lower than for the rest of 
the United States economy. Within agriculture, most production input 
classifications ai*e less concentrated than are agricultural product proc- 
essing classifications. (See Tables 3 and 4.) 

Ratios for input classifications show no consistent pattern between 
1947 and 1970 on the basis of national concentration ratios. When these 
are adjusted to a regional level lioAvever, concentration increases con- 
siderably over national ratios. At local levels it is apparent that fanners 
have few, if any, alternative suppliers. ISIuch of this is believed to be 
caused by economies to scale in distril)ution, so there are trade-offs 
involved, between farmers having more choice or paying for less effi- 
cient ser\'ices. 

Local alternatives for farmers in marketing agricultural products 
are also few. Of course concentration is not the sole or even the most 
important factor in determining the number of alternatives available 
to farmers. Aiiticipated consumer demand and contracting policies of 
processors are also important. 

For manufactured foods such ns cereal preparation, flour milling, 
ice cream and cheese, liquor, and shortenintr, high levels of concentra- 
tion exist. But national data are not useful in measuring alternatives 
in local markets. For example, the four-firm national concentration 
ratio for macaroni and spajxhetti is 31 percent, but in regional markets 
it is not unusual for concentration to reach 98 percent. 

ALTi:RNATrvT:s FOR Dealing With Market Power 

The realistic alternatives for dealing with market concentration and 
power include the following: 

Enforcement of existing statutes and nmo regylatiom to main- 
tain competitive hehavior. — Despite the fact that the United States 
economy has grown substantially since the turn of the century, thei^e 
liave been fewer larsre cases brouo-ht by regulatory agencies involving 
actual or attempted monopolization in the 1960's and 1970's than in 
the two decades following passage of the Sherman Act in 1890. The 
experience of enforcement has been subject to politics; and manipula- 
tion and — depending upon political philosophies — has been unequal. 
In brief, enforcement has not been as vi.oforous or as effective ns needed. 
We therefore chose not to pursue this alternative further in this paper 
because it is evident that the existing procedures have not inhibited 
increased concentration. 

Enconraqement of coiiiitervailinq poirer, — Some aspects of anti- 
trust public policy encourage countervailing power to be developed 
and used against those who possess large amounts of market power. 
Labor union, fishery cooperatives, and farmer cooperative^; operate 
under limited but important exemptions to some — but not all — anti- 
trust laws. Other industries, incliuling SDorts and insurance, also enjoy 
some exemptions. The administration of existing laws — or lack of it — • 



94 



has made possible the development of countervailing power where it 
previously was nonexistent. The continued development of counter- 
vailing power results in unequal power among firms which may lead 
to further abuse of competition, but on a much larger scale. It also 
results in an economy of giant sources of offsetting power, each capable 
of exerting strong influence over other sources and society as a whole. 
If left unabated countervailing power could lead to the crippling of an 
entire economy, even if it is regulated by existing agencies under exist- 
ing laws. 

We do not believe the concept of countervailing power is an ultimate 
solution to problems of large size and market power, even though we 
recognize the need for more economic equity in current enforcement 
practices in many industries. Enforcement of existing laws has not 
discouraged widespread development of conglomerate power in the 
United States, and in fact, has been ineffective in coping with this 
aberration of economic power. 

Industrial resti-uctvring. — Economists, industry leaders, and poli- 
ticians have questioned the exact relationship between market concen- 
tration and economic power. Recent experience should convince us that 
high concentration provides considerable economic discretion to large 
firms. In competitive industries, firms lack such discretion. An obvious 
solution is to restructure high-concentration industries so that no firm 
is large enough to possess unreasonable market power; then a firm 
would be forced by its competitors to offer competitive prices and 
terms of trade to both its customers and its suppliers. A w^ay to achieve 
this would be to require very large firms to divide into several firms, 
either as competitors in the same industry, or, where practical, into 
different industries. The remainder of this paper focuses on this rather 
broad and controversial policy proposal : the diffusion of concentrated 
industries. 

Basis for Diffusing Concentrated Industries 

The basis for a divestiture proposal is fourfold : 

1. A more competitive market is presumed to be preferable to either 
monopoly control or government bureaucracy. 

2. Beyond some maximum level of concentration, a competitive free 
market does not and cannot exist. 

3. Current antitrust laws do not cope effectively with existing market 
power in much of the economy. 

4. Performance in concentrated industries is economically, polit- 
ically, and socially less desirable than that of moderate- and lov/-con- 
centrated industries. 

Carving up large companies into two or more separate entities may 
seem a far-fetched idea to many. In fact, it is not far-fetched ; it is not 
even new. A number of prominent economists — George Stigler, Carl 
Kayson, W. F. Mueller, and Donald F. Turner among them — have 
argued persuasively for just such a step. The courts, while generally 
reluctant to take such a drastic action, have, since 1890, ordered cor- 
porate dissolution, divestiture, or divorcement in 26 instances involv- 
ing giant firms. 

Some of these court-ordered split-ups were extreme. Examples in- 
clude the division of Standard Oil of New Jersey into 33 pieces in 



95 



1911 ; the dissolution of the American Tobacco Company into 16 parts, 
including American Tobacco, Liggett and Myers, P. Lorillard, Rey- 
nolds, and the American Snulf Company ; the separation of duPont 
into three powder manufacturing firms; the forced sale of the Pull- 
man Company's operating branch from its parent sleeping car manu- 
facturing operation; the court-ordered sale of over 1,000 motion pic- 
ture theatres owned by the five leading movie-producing firms; and 
the break-up of ownership of individually integrated activities by the 
four major meat packing firms by the Packers Consent Decree in 1920. 

Other split-ups have been milk, such as the ruling that duPont end 
its joint ventures with another large chemical company; and tlie deci- 
sion that United Shoe Machinery Corporation divest its tack, nail, and 
e^^elet manufacturing subsidiaries. 

Even now pressure is being brought to bear for the break-up of 
large companies: rumblings are heard about breaking up the giant 
United States oil companies; and, within the past few months the 
Federal Trade Commission announced it was prepared to bring suit 
for dissolution against General Motors. But the courts have been re- 
luctant to perform surgery on huge firms; since the mid-1950's only a 
handful of divestitures — all of them small — have been ordered. 

Existing legislation is inadequate for restructuring concentrated in- 
dustries. First and foremost, the Sherman Act is vague. Economists 
and lawyers have debated the meaning of the word "monopolize" for 
over fifty years. As a consequence, antitrust action is much more likely 
under existing law for anticompetitive conduct or corporate behavior j 
not simply for the possession of monopoly power as such. Further- 
more, even if federal antitrust agencies were willing to vigorously 
enforce legislation to restore greater competition in concentrated in^ 
dustries, there are serious impediments to such activity. First, the cost 
of ligitation in large "monopoly" cases is overwhelming. Present 
appropriations are inadequate to permit pursuing the Section II 
Sherman Act standard against the vastness of concentrated industries, 
let alone against the very large firms within them. This probably re- 
sults in citing smaller cases of alleged monopoly power abuse, rather 
than tackling the large ones. Second, manpower limits exist in federal 
agencies. Third, large firms may use their political power to apply 
pressure on congressmen, senators, and appointed officials. The net 
result is that changes in concentration over time indicate the rate of 
concentration is increasing more rapidly than the success of federal 
agencies in restoring competition. 

Impuementtn^g Restructuring 

Based on the preceding evidence, we conclude new approaches to 
restructuring are needed, namely : a new mandate from the Congress 
indicating it supports a public policy designed to improve the effec- 
tiveness of competition in the economy ; and a new statute to permit 
effective and expeditious steps to bring this about. 

In 1973 Senator Philip Hart introduced legislation— "The Indus- 
trial Eeorganization Act" (S. 1167)— to enable restructuring where 
industries are concentrated and where market power exists. The main 

67-134 — 76 8 



96 



provisions of this act which is still pending action were designed to 
produce these results : 

1. Provide a strong congressional mandate for a vigorous policy to 
restore competition in concentrated industries through "judicious in- 
dustrial restructuring in key industries." 

2. Overcome the problem of definition of monopoly power in present 
legislation. Possession of monopoly would be specified by standards. 

3. Establish an organizational and procedural framework that 
could expedite relief in the most important segments of the economy 

by: 

(a) establishing an Industrial Reorganization Commission for 
the sole purpose of enforcing the act ; 

(h) directing it to give top priority to seven important concen- 
trated industries ; 

(e) establishing a special Industrial Reorganization Court 
that would provide a panel of judges to deal specifically with 
cases originating under the act. 

4. Authorize the commission and court to explore a variety of ways 
for reorganizing an industry to enhance competition. The Industrial 
Reorganization Commission may explore methods of increasing com- 
petition beyond those available to the Industrial Reorganization 
Court. For example, in some cases it might recommend that govern- 
ment actions be taken to encourage new entry in an industry ; in others 
it might consider the desirability of establishing government-owned 
enterprises in highly concentrated industries much like Sweden has 
done with apparent success in the drug industry. 

To overcome existing limitations of the Sherman and Federal Trade 
Commission Acts it would be necessary to define monopoly quite 
specifically. For example, the Industrial Reorganization Act provided 
that "there shall be a rebuttable presumption that monopoly power is 
possessed" by any corporation that persistently earns after-tax profits 
exceeding 15 percent; if there has been no substantial price compe- 
tition among two or more corporations for a period of years ; and if 
four or fewer corporations account for 50 percent or more of sales in 
a relevant economic market. 

A corporation falling within these criteria would have the burden 
of rebutting the presumption that it had monopoly power. Three 
defenses against such a charge would be allowed : 

1. The degree of concentration was due solely to the required econo- 
mies of scale needed to operate an efficient-sized operation. 

2. The market power of the firm stemmed from demonstratable su- 
perior efficiency and innovativeness. 

3. The size of firm resulted solely from the ownership of valid 
patents. 

Consequences or Reducing Market Powt:r 

Industries Affected.—The number of firms and industries affected 
by a restructuring policy would depend on the degree of concentration 
chosen to represent unreasonable market power and on the delinea- 
tion of meaningful relevant markets. Even taking the relevant market 
to be a national one and attacking only industries where the top four 
firms control 80 percent of all sales, a number of industrial giants 
would become likely candidates for fragmentation. Among them 



97 



would be firms in sucli industrios as steel, automobiles, cans, glass 
bottles, cement, tires, and oil refining. Note that restructuring such 
industries with smaller but more firms would not directly alffect thie 
marketing system for agricultural products; however, if the allevia- 
tion of unreasonable market power was reflected in lower prices for 
these products, farmers as purchasers of such goods would benefit. 

Likely candidates for divestiture wdthin the food industry would 
include cereal manufacturers, tobacco manufacturers, and grain ex- 
porters. Using lower market share criteria and/or a more tightly 
delineated relevant market on the regional or local level, a whole array 
of firms within the agricultural marketing sector would be included. 
Among others, the list would certainly include dairy processors, retail 
food chains, general food manufacturers, farm machinery companies, 
livestock packers, and aspects of the broiler industry. 

Consequences of Reducing Market Poxoer in Celling. — It is difficult 
to project the probable consequences of an aggressive fragmentation 
policy that succeeds in reducing market power within the economy; 
however, some crude estimates have been attempted. Scherer esti- 
mates the total loss to our economy from market power at 6.2 percent 
of the gross national product. Some economists believe the social 
loss to be less than this, but Scherer believes his estimate to be mod- 
erate, even though not precise.^ 

For sake of discussion, suppose Scherer's figure is accurate. At cur- 
rent GNP levels wiping out this welfare loss to the economy would 
mean a $90 billion savings. The agricultural sector, from farmer to 
consumer, is huge — larger than the automobile industry, oil, or even 
the defense establishment. Fully 10-15 percent of the savings might 
be expected to occur in the agricultural sector. Translated into net 
farm income, an increase of $300-$400 million annually might be 
realized just because of increased consumption of food caused by lower 
prices at^ the retail level. On top of this would be added savings by 
farmers in terms of reduced costs of production inputs supplied by 
presently-concentrated industries. A five percent reduction in pro- 
duction expenses would result in an approximate 15 percent shortrun 
increase in farm income.'^ 

Potential gains of this magnitude may be unrealistic. But even if 
realized savings and income gains to farmers and the public at large 
are only one-half or one-fourth as great as those estimated above, a 
policy of fragmentation would seem to merit serious consideration. In 
addition, there could be favorable general effects on society and gov- 
ernment from reduction of political and economic power. 

Consequences of Reducing Market Power in Buying. ~lt is impor- 
tant to note that enhanced farm prices owing to the fragmentation of 
agricultural marketing firms who are first buvers of farm commodi- 
ties were not considered in the above speculations. 

Welfare losses caused by market power in buying are even more diffi- 
cult to quantify than are those resulting from monopoly power in 
selling. Placing any figure on such costs would be purelv guesswork. 
But m California an antitrust suit by nine cattle producers against the 

Mc>S'llT & Co^ThiVaco^'m?^^ ^i^r^^t Structure and Economic Performance," Rand 
J Farmers would be expected to increase production in response to lower costs - thus 
this increase in income might not be maintained as farm prices fall back 



98 



three largest food retailer firms resulted in two out-of-court settlements 
and one $32 million judgment for damages.^ 

We know for a fact tJiat producers of many farm products are at a 
severe disadvantage vis-a-vis the much larger, often better-informed 
potential buyers of their crops. As agricultural marketing firms be- 
come fewer and larger, more marketing alternatives are becoming 
foreclosed to the producer, making him even more at the mercy of a 
few buyers or even a single purchaser. 

The meat packing industry serves as a good example here. At the na- 
tional level, the meat industry is not among the highly concentrated 
ones. The largest four firms control less tlian one-fourth of the market. 
Moreover, concentration at the national level is much lower today 
than it was in the early 1900's. 

But what about the more localized level, which is the relevant mar- 
ket to a farmer selling his livestock? Engleman and Arpelin of the 
USDA found that in the Korth Central region the top four firms 
slaughtered over 75 percent of all cattle in two states and over 65 
percent in four others. In hogs, the top four firms accounted for over 
75 percent of slaughter in seven states. For lambs, the big four account 
for 100 percent of all commercial slaughter in the top producing 
states.^ 

Even though we are not prepared to place a dollar figure on the 
possibility of enhanced returns to farmers by the forced restructuring 
of concentrated buyers of farm products it appears that existing evi- 
dence again calls for a serious look at a fragmentation policy as a bene- 
fit to farmers and the public. 

Effects on Farmer Cooperatives and Labor Unions — By virtue of 
their organization, farmers' marketing cooperatives that qualify have 
been granted a narrow but significant exemption from monopoliza- 
tion and conspiracy by the Capper- Volstead Act. Presently, the Justice 
Department and Federal Trade Commission are expressing concerns 
about such exemptions. Pursued to the extreme position, farmer mar- 
keting cooperatives could probably not exist without such exemptions 
because the cooperative itself is defined as being joint action by its 
members. 

Marketing orders and other related agricultural programs have 
also been granted exemption from antitrust laws, but are now under 
attack by federal regulatory agencies and by consumer activists. 

Labor unions have also been granted exemptions similar to farmer 
marketing cooperatives, and they have prospered and thrived under 
this exemption. Labor union exemption extends not only to their 
rights to organize workers, but also to their operating procedures such 
as industry-wide negotiation. This type of exemption has not been ex- 
tended to farmer bargaining cooperatives which must negotiate on 
an individual firm basis to remain within the law. Thus, labor unions 
enjoy special exemptions. 

It must be argued that if public policy remains supportive of the 
countervailing power concept of competition, efforts of federal regu- 
latory agencies to curb the development of cooperative marketing as- 
sociations would be counter to the public interest. Few if any farmer 

8 The judgment was appealed, but before coming to trial was settled out of court for 
$9.2 million 

» Aspelin, A. and Engelmon, G., "National Oligopoly and Regional Oligopoly in the Meat 
Packing Industry." Paper presented at annual meeting of American Agricultural Economics 
Assoc., Gainesville, Fla., 1972. 



99 



cooperatives are able to achieve profits comparable to large, general, 
food-manufacturing firms. Thus, it appears that current antitrust ac- 
tivity against farmer cooperatives is a deliberate choice of federal 
agencies, not because of performance, but because of ease and cost of 
filing complaints and court procedures against cooperatives, instead 
of tackling the large food manufacturers and distributors, including 
conglomerates. The selection process is seemingly simplified for regu- 
latory agencies. 

If legislation requiring fragmentation of concentrated industries 
were enacted, there is a strong argument to make it economy wide, 
rather than only for portions of the economy. Thus, farmer coopera- 
tives possessing characteristics of the large general corporations would 
be equally and equitably subject to criteria for competition in such leg- 
islation. At the same time, the vast market and economic power of 
labor unions must also be curtailed on an equal and equitable basis with 
other possessors of economic power. 

Concluding Thoughts 

The choices are easy to identify, but the decision criteria are diffi- 
cult to specify. We have assumed that despite the problems of the 
United States economy, it generally remains the most preferred and 
acceptable economic and political system ; that is, we are and will re- 
main committed to a competitive market system. To achieve the most 
that such a system can provide to a society, the choices seem to be 
these : 

1. Existing antitrust laws, with necessary amendments, should be 
more vigorously enforced. The available evidence suggests this alter- 
native has major weaknesses. 

2. Countervailing power, somew^hat related to the first alternative, 
has resulted in unequal development of power so, in effect, there is 
freedom to counter existing power. The practical ability to do so is 
difficult because of the advantages held by large firms already posses- 
sing superior strength. 

3. Restructure concentrated industries to make possible greater com- 
l^etition. This has been the focus of this paper. 

We have been critical of the agricultural market system. While the 
criticism may have been warranted, just as easily praise in at least 
equal doses could have been given. Our system is not perfect, but it 
functions more efficiently than any other in the world. We have not 
presented arguments in favor of big business — ^and there are many 
that could have been made. 

Changes need to be made in our economic system. We have described 
a radical one. Some may view the proposal as a backward step ; others 
may see it as the first meaningful step toward economic reform since 
passage of the Clayton Act in 1914. The authors view it as neither, but 
simply as one of a number of alternatives that merit our society's seri- 
ous consideration. 

We are of the opinion that only in a less concentrated environment 
ran the agricultural marketing system be assured of providing equity 
for farmers and consumers. Each of the papers in this series offers sug- 
.(restions for doing this. The industrial restructuring alternative pre- 
sented in this paper may be the broadest and most radical alternative 
put forward. Before rejecting this alternative, the public should bear 



100 



in mind that, too often, we change our legal and economic institutions 
with constant minor tinkering, sometimes of a purely cosmetic nature. 
Perhaps a major overhaul is needed. If so, industrial restructurmg 
may be the best way to restore greater competition in concentrated 
industries. 

SELECTED BIBLIOGRAPHY 

Caves, Richard, "American Industry : Structure Conduct, Performance." 3rd 
Edition, Prentice-Hall, Englewood Cliffs, N.J., 1964. 

'•Congress and the Monopoly Problem." Select Committee on Small Business, 
House of Representatives, S9th Congress, 2nd Session, 19(5(5. 

Engelmon, G., and Aspelin, A., "National Oligopoly and Regional Oligopoly in 
the Meat Packing Industry." Paper presented at annual meeting of American 
Agricultural Economics Assoc, Gainesville. Fla., 1972. 

Galbraith, John K., "American Capitalism: The Concept of Countervailing 
Power." Cambridge. Houghton Mifflin, 1952. 

Kaysen, Carl and Turner, Donald F., "Antitrust Policy: An Economic and 
Legal Analysis." Cambridge, Harvard Univ. Press, 1959. 

Mansfield, Edwin, "Monopoly Power and Economic Performance." TV. W. Nor- 
ton & Co., Inc., N.Y.. 1964. 

Mueller, W. F., "Current Policy Issues in Antitrust." Unpublished paper pre- 
sented at Conference on Industrial Organization : Policy Planning in Antitrust, 
Southern Illinois University, April, 1973. 

■ . "Industrial Concentration: An Important Inflationary Force." Paper 

presented at Columbia Law School Conference on Industrial Concentration, 
March 2, 1974. 

, Statement concerning the Structure and Performance of the Food In- 
dustries before Committee on the Judiciary, Subcommittee on Monopolies and 
Commerce, House of Representatives. July 19. 1973. 

National Commission on Food Marketing. "Food From Farmer to Consumer," 
U.S. Government Printing Office, Washington, 1966. 

Robbins, William. "The American Food Scandal : Why You Can't Eat Well on 
What You Earn." William Morrow & Co.. Inc., New York, 1974. 

Scherer, F. M., "Industrial Market Structure and Economic Performance." 
Rand McNally & Co., Chicago, 1970. 

"Value-of-Shipments Concentration Ratios by Industry." Annual Survey of 
Manufactures, 1966 and 1970. U.S. Government Printing Office, 1968 and 1972. 

TABLE 1.— NUMBER OF MANUFACTURING CORPORATIONS WITH ASSETS EXCEEDING $250,000,000 AND 
$1,000,000,000, AND SHARE OF TOTAL ASSETS OF CORPORATIONS ENGAGED PRIMARILY IN MANUFACTURING 
1909-72 1 

[Assets in millions] 



Firms with assets over $1,000,000,000 Firms with assets over $250,000,000 

Share of total Share of total 

corporation corporation 

Assets assets Assets assets 



Year Number (thousands) (percent) Number (thousands) (percent) 



1909 1 $1,822 (0 3 $2,480 (') 

1919 1 2,366 (1) 16 7,900 (2) 

1929 2 5,378 8 31 18,390 27 

1935 3 5,132 9 25 14,882 26 

1948. 12 20,107 17 59 36,692 33 

1959 24 61,207 27 127 115,357 59 

1969 87 229,461 46 293 330,592 69 

1972. 151 321,158 52 350 435,708 70 



1 Taken from W. F. Mueller, "Current Policy Issues in Antitrust," (unpublished paper) 1973. 

2 Total asset data for all manufacturing corporations not available. 

Source: Number and assets of corporations for 1909 to 1948 are based on Collins and Preston, "The Size Structure of 
the Largest Industrial Firms, 1909-58," "American Economic Review," December 1961, pp. 1005-1011. Total assets 
for these years are based on Internal Revenue data. Firm data and asset data for 1959-72 are for the 1st quarter of each 
year, respectively, as reported in FTC-SEC "Quarterly Financial Report for Manufacturing Corporations" for various 
years. Asset data are for corporations engaged primarilv in manufacturing, both domestically and abroad. Therefore, 
some manufacturing assets and assets of foreign operations are included among the assets of the largest corporations 
and by all corporations. The data do not include enormous amounts of nonconsolidated assets held by the largest 
corporations. See FTC staff report on "Corporate Mergers," 1969, p. 175. Thus the figures for 1969 to 1972, at least, likely 
understate the largest corporations' share of total assets held by all corporations engaged in primarily manufacturing. 



101 



TABLE 2— AVERAGE FOUR-FIRM UNWEIGHTED CONCENTRATION RATIOS BY TYPE OF INDUSTRY FOR 168 

INDUSTRIES, 1947-70 



Consumer goods: Degree of differentiation! 

Producer 

Goods All Low Moderate High 

Date Industries (N=98) (N=70) (N=20) (N=34) (N = 16) 



Average unweighted 4-firm concentration; 

1970 42.6 42.9 42.2 28.2 41.1 .jt-^f 62.3 

1967 41.5 42.0 40.7 26.0 39. 5 - 61.6 

1963 41.4 42.5 39.9 25.8 38.8 59.8 

1958 40.4 42.6 37.4 23.8 36.7 ^ 55.9 

1954.... 40.9 43.5 37.1 25.3 35.8 " Sk 54.6 

1947.. 40.9 44.2 36.4 27.8 35.1 ' 49.6 



Change, 1947-70.. +1.7 —1.3 +5.8 +.4 -6.0 +12.7 



1 The classification of industries as between producer goods and consumer goods, as v/ell as by the degree of product 
differentiation is based on the classification system developed in Bureau of Economics, Federal Trade Commission, "Com- 
parable Concentration Ratios for 213 Manufacturing Industries Classified by Producer and Consumer Goods and Degree of 
Product Differentiation 1947, 1954, 1958, and 1963," Mar. 15, 1967. 

Source: W. F. Mueller, "Current Policy Issues in Antitrust" (unpublished paper) 1973. 



102 



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103 



TABLE4.— INDUSTRYCONCENTRATION RATIOS FORSELECTED AGRICULTURAL PRODUCT PROCESSING INDUSTRIES 



Values of industry shipments percent accounted for by the 4 largest companies 

1966 1 

SIC adjusted Factors i 

code for adjusted 

Classification title No. 1970 1967 1966 factors 1963 1958 1954 1947 for: 



Meatpacking plants 2011 23 26 

Sausages and prepared meats 2013 16 15 

Poultry dressing plants.- 2015 16 15 

Creamery butter 2021 (2) 15 

Cheese, natural and process 2022 43 44 

Condensed evaporated milk 2023 39 41 

Ice cream and frozen desserts 2024 30 33 

Fluid milk 2026 20 22 

Canned cured seafoods 2031 53 44 

Canned specialties 2032 66 69 

Canned fruits and vegetables 2033 21 22 

Dehydrated food products 2034 33 32 

Pickles, sauces, salad dressing 2035 38 33 

Fresh or frozen packaged fish 2036 38 33 

Frozen fruits and vegetables 2037 26 24 

Flour and grain mill products 2041 30 30 

Prepared feeds. 2042 24 23 

Cereal preparations. 2043 90 88 

Rice milling 2044 50 46 

Blended and prepared flour 2045 (2) 68 

Wet corn milling 2046 64 68 

Bread, cake and related products 2051 29 26 

Cookies and crackers 2052 59 59 

Raw cane sugar.. 2061 45 43 

Cane sugar refining 2062 59 59 

Beet sugar 2063 65 66 

Confectionary products... 2071 30 25 

Chocolate and cocoa products 2072 79 77 

Chevkfinggum 2073 85 86 

Malt liquors 2082 46 40 

Malt 2083 (2) 39 

Wines, brandy and brandy spirits 2084 (2) 48 

Distilled liquor, except brandy 2085 47 54 

Bottled and canned soft drinks 2086 13 13 

Flavoring extracts and sirups 2087 61 67 

Cottonseed oil mills 2091 39 42 

Soybean oil mills 2092 56 55 

Vegetable oil mills.. 2093 60 56 

Animal and marine fats and oils 2094 (2) 28 

Roasted coffee 2095 58 53 

Shortening and cooking oils 2096 46 43 

Macaroni and spaghetti. 2098 (2) 31 

Food preparations n.e.c 2099 26 24 

Cigarettes 2111 84 81 

Cigars.... 2i21 61 59 

Chewing and smoking tobacco 2131 (2) 51 

Tobacco stemming and redrying 2141 66 63 

Weaving mills, cotton 2211 33 30 

Weaving and finishing mills, wool 2231 54 55 

Leather and sheep lined clothing 2386 Q) 24 



27 (40) 

16 (30-40) 

17 (20-30) 
(50) 



(60) 
(50) 
(70) 

(80) 
(40) 

(50) 

33 
33 



24 


(40-50) 


31 


(45) 


23 


(30-40) 


87 


87 


45 


45 


69 


(75) 


67 


67 


25 


(50) 


59 


(70) 


50 


50 


63 


(40) 


68 


(40) 


24 


(40-50) 


78 
88 


(85) 
88 


29 


(65) 


41 


41 


41 


41 


55 


55 


14 


(30-40) 


63 


63 


38 


38 


57 


57 


53 


53 


25 


25 


54 


(50-60) 


47 


(80-90) 


31 


31 


26 


(60-70) 


81 


81 


58 


58 


59 


59 


69 


(70-80) 


30 


(40) 


56 


(50) 


24 


(60) 



31 


34 


39 


41 


p 


16 








R 


14 








R 


11 


11 


16 


18 


R 


44 








R, B 


40 








R, B 


37 


38 


36 


40 


l' 


23 


23 


23 


22 


L 


38 










67 








B 


24 








R, B 


37 


45 


48 


56 


B 


36 










36 










24 








R, B 


35 


38 


40 


29 


R 


22 


22 


21 


19 


R, B 


86 


83 


88 


79 




44 


43 


41 


33 




70 








B 


71 


73 


75 


77 




23 


22 


20 


16 


R, B 


59 








B 


47 








63 








N 


66 


64 


66 


68 


N 


15 


18 


19 


17 


B 


75 


71 


70 


68 


B 


90 


89 


86 


70 




34 


28 


27 


21 


R 


38 


50 


49 


49 




44 


35 


38 


26 


B,l 


58 


60 


64 


75 


B,l 


12 


11 


10 


10 


L 


62 


55 


53 


50 




41 


42 


47 


43 




50 


40 


41 


44 




38 


66 








23 


20 








52 








B 


42 


44 






L 


31 


25 


25 


23 




24 








B 


80 


79 


82 


90 




59 


54 


44 


41 




58 


57 


58 


61 




70 


73 


79 


88 


B 


30 


25 


18 




B 


51 








B 


28 


18 


18 


24 


B 



1 Key to symbols: R— Markets are mainly regional in scope; L— Markets are mainly local in scope; B— Census industry 
definitions are too broad; N— Census industry definitions are too narrow; I— Imports are a significant fraction of total 
sales. 

2 s— data suppressed because some of the largest companies were approximately the same size as others not included 
in the sample, and therefore a reliable numerator could not be computed. 

Source: "Value-of-Shipments Concentration Ratios by Industry," "Annual Survey of Manufacturers," 1966 and 1970 
M66(AS)-8 and M70(AS)-9, U.S. Government Printing Office, Washington, D.C. 1968 and 1972. 



THE OPTIONS IN PERSPECTIVE 



[By Ronald D. Knutson ^ and Olan D. Forker ^] 



Ten alternative methods of improving the market system for agri- 
cultural products have been discussed. Sorting them out and deciding 
the commodities and conditions to which they are applicable is not an 
easy task. This paper is designed to put the options in perspective. Its 
objective is to provide the reader with a basis for comparing the alter- 
natives in terms of: (1) the marketing problems they address, (2) the 
commodity situations to which they most readily apply. (3) the ability 
to utilize combinations of alternatives, (4) the distribution of bene- 
fits, and (5) the nature of producer initiative needed to obtain the 
alternative. The reader, of course, will need to make the ultimate de- 
cision of which alternatives, and combinations thereof, apply to spe- 
cific situations. 

The Marketing Problems Addressed 

Each of the ten alternatives discussed in this series of papers is de- 
signed to address particular problems farmers face in marketing 
their products or purchasing inputs. Five problems appear to be of 
prime importance : 

1. Enhancement of competition among buyers and /or sellers of in- 
puts of farm products, thereby improving the competitive conditions 
under which products are priced. 

2. Improvement of information available to producers and the pub- 
lic, thereby providing a better basis for public and private marketing 
decisions. 

3. Improvement of the balance of market power by increasing the 
power of producers to give them a market position comparable to that 
of buyers of farm products or input supplies. 

4. Improvement of producer access to markets. Access to a market 
is improved if there are more alternative outlets which are easier to 
take advantage of, or if there is a commitment on the part of the buyer 
to accept the producer's production. 

5. Improvement of production coordination with market needs. Im- 
proved coordination means that the type, quality, and quantity of pro- 
duce is more closely associated with market needs. 

Table 1 furnishes a summary of the principal impacts of each alter- 
native in providing solutions to each of the five marketing problems. 
Some of the alternatives contribute only to solving a single problem : 
mandatory reporting's principal effect is to improve information, and 
industrial restructuring is designed to enhance competition by break- 
ing up firms from which farmers buy inputs and to which they sell 

1 Professor, Deportment of Afrricultnral Economics, Texas A&^^ University. 

2 Professor, Department of Agricultural Economics, Cornell University. 



(104) 



105 



their products. On the other hand, electronic auctions have the effect 
of enhancing competition, improving information, and improving pro- 
ducer market access. 

Producer Ixitiatrtes Versus Goverxmext IxvoL\T:3rEXT 

The decision as to whether any of the alternatives are acceptable to 
producers may hinge on the answers to two important questions : 

What type and level of producer initiative is required to get 

the alternative implemented ? 

What amount of government involvement in production and 

marketing decisions is implied by the alternative ? 
Table 2 provides a comparative analysis of each aspect. To a certain 
extent, producer initiatives are a substitute for government involve- 
ment. For example, ownership integration requires a very high level 
of producer initiative, both in terms of financial contributions by the 
producer and his commitment to the market through his organiza- 
tion — with no increased government involvement. An electronic ex- 
change system would require either a commitment from producers to 
use the system or a marketing order that would require use of the sys- 
tem. Some of the alternatives would require both increased government 
involvement and producer initiative to make them effective. Exclusive 
agency bargaining is an example. 

TABLE 1— IMPACT OF MARKETING ALTERNATIVES IN SOLVING 5 PRODUCER MARKETING PROBLEMS 



Impact on marketing problem 

Enhance Improve Balance Improve mar- Improve 

competition information power ket access coordination 



Marketing alternative: 

Electronic exchange X X .-- X 

Contract markets. X X X X 

Mandatory reporting X 

Exclusive agency bargaining X X 

Ownership integration XXX 

Joint venture X X 

Marketing orders X X 

Marketing boards X X 

Industrial restructuring X X 

Fine tuning XXX 



TABLE 2— PRODUCER INITIATIVE AND GOVERNMENT INVOLVEMENT IN MARKETING ALTERNATIVES 

Type and level of producer initiative Level of 

government 

Market alternative Financial Market involvement 



Electronic exchange Low Moderate Moderate. 

Forward deliverable contract markets Low High Lov/-moderate. 

Mandatory reporting None None Moderate. 

Exclusive agency bargaining Low High.. Moderate, 

Ownership integration... High High.. None. 

Joint venture... Moderate High None. 

Marketing orders Ncne Low High. 

Marketing boards... None. Low. High. 

Industrial restructuring None None High. 

Fine tuning Low Low Low. 



Commodity Applicatioxs 



Some alternatives are more applicable to particular commodity sit- 
uations than others because of the structure of their markets or their 



106 



particular problems. Five major commodities or commodity groups 
are discussed for illustrative purposes. 

Lwestock. — Livestock industries, defined here as liogs, cattle and 
sheep, appear to be at a production-marketing turning point. In each 
industry pricing becomes a major problem as central markets decline 
in importance. In each industry many believe there is the threat of 
vertical integration, whether by contract or ownership similar to what 
now exists in broilers. 

One alternative is to restore competition by restructuring the buyer 
side of the market and prohibit vertical integration by either packers 
or ranchers. It seems unlikely this action will be taken; therefore, 
producers of livestock appear to have the following marketing alterna- 
tives : ( 1 ) They could recognize integration as a reality and take ini- 
tiative to develop a producer-owner integrated production-marketing 
system, including the ownership of packing facilities. (2) Livestock 
producers could rejuvenate the present marketing and pricing system 
by establishing a network of electronic exchanges. Such a system has 
already proved successful in Canada for marketing hogs and, on a 
much smaller scale, in the United States, for marketing sheep and 
feeder pigs. In slaughter hogs or cattle a marketing order or board 
would likely be required to insure success in achieving the desired vol- 
ume moving over the electronic exchange system. (3) Livestock pro- 
ducers could allow present trends toward contracting to run its course 
but install a system of mandatory reporting of contract prices, estab- 
lish a forward deliverable contract market or provide a basis for con- 
tract negotiations. 

Poultry. — The poultry industry — ^broilers, turkeys and eggs, has 
largely run its integration course. The few remaining independent 
producers have to worry about how they can develop an ownership 
integrated system to effectively compete and thereby assure market 
access. Contract growers for integrators have two strategies that could 
effectively be used in combination : exclusive agency bargaining, and 
mandatory reporting of contract terms and statistics on internal firm 
operations of integrators. Alternatively, they could seek an electronic 
exchange system for forward deliverable contracts designed to foster 
competition in the contract market. 

Fruits and Vegetables. — Processed fruits and vegetables present a 
situation comparable to poultry with similar alternative solutions, that 
is, contracting has expanded to the point where the choice for produc- 
ers is either ownership integration, a forward deliverable contract 
market, or exclusive agency bargaining with a mandatory reporting 
system on contract terms and internal firm operations. 

Increasingly, fresh fruits and vegetables appear to be moving in the 
direction of ownership integration of production and shipping func- 
tions. Traditionally, marketing orders have been an important tool to 
guide fresh fruit and vegetable marketing. The use of marketing or- 
ders could be expanded to cover greater geographic areas, collect and 
disseminate more information, help establish remote access exchange 
mechanisms, or operate forward deliverable contract markets. 

Grains. — In grains, export markets have become a prime price- 
determining factor. These markets are dominated by a few large firms 
with highly sophisticated intelligence systems. IVIandatory reporting 
of export market transactions has been instituted but has not solved 



107 



the problem of equal access to market information. It may never. In 
this situation, producer alternatives appear to narrow to two : market- 
ing boards representing producers in international transactions, or an 
effective producer-owned integrated export marketing system. 

Cotton. — Alternatives in cotton appear to be more extensive than in 
grain: an electronic exchange system could, potentially, replace the 
current spot-price committee system; producers have the option of 
ownership integration into spinning and fabrics; and mandatory re- 
porting of contract terms may be required if the industry goes the 
contracting route. There could then be bargaining over the terms of 
these contracts or a forward deliverable contract market. 

Cax Combinations Be Used? 

It's apparent from the previous discussion of applications to 
commodity situations that some of the alternatives can be used in 
combination and. in fact, can complement one another, that is, sub- 
stantially greater potential producer benehts exist when used in 
combination than when applied separately. For example, bargaining 
is complemented by mandatory reporting, marketing orders and 
marketing boards. On the other hand, bargaining tends to conflict with 
vertical integration — unless, of course, the bargaining organization is 
doing the integrating, in which case integration actually complements 
bargaining. 

Industrial restructuring conflicts with alternatives designed to in- 
crease producers' market power : vertical integration, bargaining, and 
joint venture. 

Some alternatives can be used in combination in the sense that they 
neither conflict nor complement; they are relatively neutral with re- 
spect to one another. Vertical integration and mandatory reporting, 
for example, are neutral with respect to each other. 

Table 3 is designed to provide a summary of whether each alterna- 
tive complements, conflicts, or is neutral with respect to other alterna- 
tives. Fine tuning is not included in table 3 because it is a combination 
of many strategies. 

How Will Benefits Be Distributed? 

In most economic situations one group benefits at the expense of 
another. Even in cases where substantial efficiency gains exist, more 
often than not, someone is hurt — squeezed out of business, for example, 
by the resulting structural change. The trade-offs are not always easy 
to determine and depend on the specific industry situation. A general- 
ized attempt at determining the distribution of benefits is made in 
table 4.^ Benefits may be either positive or negative. A negative benefit 
means someone is hurt. The more plus signs, the more benefits to the 
affected parties; the more minus signs, the more affected parties are 
likely to be adversely affected. Table 4 considers three main oroups — 
producers, agribusiness, and consumers. Agribusiness is divided into 
supply and marketing firms. 



' The evaluation here is very subjective and the authors of the other papers in this 
series would not necessarily agree with the magnitude nor direction of the costs and 
benefits. 



lOS 



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109 



TABLE 4.— HOW THE BENEFITS OF EACH MARKETING ALTERNATIVE ARE LIKELY TO BE DISTRIBUTED 



Distribution of benefits 



Agribusiness 



Marketing Supply 
Producer firms firms Consumers 



Marketing alternatives.. 

Electronic exchange +++ — — — N ++ 

Forward deliverable contract markets -f— f- + N + 

Mandatory reporting ++ — — ++ 

Exclusive agency bargaining- ++4- — — N 

Ownership integration ++++ _ _ — _ 

Joint venture +- 1- -f + — 

Marketing orders.. +++ N 

Marketing boards ++4- N 

Industrial restructuring + — ++-f 

Fine tuning. ++ — +4- 



Producers' gains using vertical integration, marketing orders, mar- 
keting boards, and bargaining are largely at the expense of consumers. 
With fine tuning, mandatory reporting, industrial restructuring, elec- 
tronic exchange, and forward deliverable control markets, producers 
and consumers benefit at the expense of agribusiness. In every alterna- 
tive except joint venture and contracting, agribusiness marketing: firms 
lose, with the greatest potential loss in own^rsliip integration, indus- 
trial restructuring, and electronic exchange systems. Supply firms only 
experience a large loss in the case of industrial restructuring. 

Implication of Benefits for Policy 

The distribution of benefits from the alternatives would appear to 
have substantial policy implications. These implications may be either 
in terms of the likelihood of getting legislation enacted that would en- 
able the alternative to exist, or the extent to which the public would 
allow the alternative to become a dominant industry practice or struc- 
ture. For example, with most of the benefits from vertical integration 
going to producers, it seems unlikel}^ that the public would allow an 
industry to be dominated by a single, producer-integrated cooperative. 
On the other hand, the public might allow — and in fact benefit^ — from 
producer integrated cooperatives competing with the corporate agri- 
business sector. A strong, integrated, producer grain-export coopera- 
tive, for example, could yield substantial producer benefits, hurt 
current proprietary grain exporters, and be relatively neutral so far as 
consumers are concerned. 

It can be concluded that the public would likely allow producer al- 
ternatives such as vertical integration, bargaining, and joint ventures 
to exist or grow until they begin restricting competition and thus ma- 
terially hurt consumers. On the other hand, it should be possible to find 
consumer allies in implementing alternatives such as fine timing, man- 
datory reporting, electronic exchange systems, forward deliverable 
market contracts, or restructuring. Marketing boards, marketing or- 
ders, and enabling legislation for exclusive agency bargaining would 
be difficult to obtain because of possible adverse impact on both agri- 
business and consumers. 

O 



J 

UNIVERSITY OF FLORIDA 




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3 1262 09113 0863